Public finances under plurality and proportional electoral systems. Evidence from Hungarian municipalities

In this paper I provide evidence on effects of plurality and proportional electoral systems on fiscal outcomes. In Hungary different voting regimes are applied to elect the members of local councils: in places where more than 10,000 people live a variant of proportional voting system, while below a variant of plurality voting system is used. The setting allows me to apply a regression discontinuity design to identify the causal effect of the electoral system on political and fiscal outcomes. Under the plurality system targeted money transfers are more present - in election years there is a higher tax break, while under the proportional system a higher level of public good provision occurs - in non-election years investment activity is higher. The overall spending is not significantly higher under the proportional system. Interestingly the political variables do not differ under the two voting regimes. The findings are in line with Lizzeri and Persico (2001) theoretical predictions and the results demonstrate that plurality vs. proportional systems per se influence public finances, not only indirectly.