The cost of pride: When politicians choose image over public good

Research from Esade’s Assistant Professor Vicente J. Bermejo shows that incumbent governments in financial difficulties will choose high-cost private bailouts to protect their own reputations, rather than accepting more favorable terms that require public scrutiny of their policies. 

The research, co-authored by Andrés Gago (Universidad Torcuato Di Tella), Jose María Abad (World Bank Group) and Felipe Carozzi (London School of Economics), analyzed data from multiple sources including the International Monetary Fund (IMF), Spain’s post-recession government bail-out program, a survey of Spanish mayors and thousands of items of news coverage. 

Re-elected governments tend to opt for policies that impose higher costs on citizens to cover their past policy failures

All the findings indicate that newly elected governments have no qualms about sharing financial plans in exchange for assistance and favorable repayment terms. Re-elected governments, however, opt for policies that impose higher costs on citizens, as these choices prevent the public from uncovering their past policy failures. 

Cross-country interventions

The researchers began with an analysis of 2300 IMF interventions in 124 democratic countries, between 1992 and 2021. They found that IMF agreements are common, with new financing agreements taking place in 11% of the sample. New financing agreements are 5.4 percentage points more common in years in which a new government is in power (instead of re-elected incumbents). 

After adjusting for country level characteristics, estimates indicated newcomers are between three and four percentage points more likely to agree on an IMF funding program. However, when the new government was elected during a banking crisis, this figure rose to between 25 and 29 percentage points.  

The results provide compelling evidence that new governments are more likely to request external financial assistance than incumbent parties. However, in the cross-country setting, state-of-the-art in the estimation cannot be fully achieved. 

Bailing out Spain’s municipalities

To further investigate the causal link between tenure and financial aid, the researchers examined the Spanish Supplier Payment Program (SPP). Introduced in 2012, the SPP offered aid to Spanish municipalities to eliminate the arrears accumulated during the financial crisis.  

Local governments had to choose between favorable terms made public or less advantageous terms kept private

Municipalities — the lowest level of Spanish administration — act as small representative democracies, with officials elected for fixed four-year terms. Financing comes from national and regional government transfers and local taxes. All municipalities had to accept the national government’s fiscal consolidation. However, they were offered a choice of terms: a 10-year term including a two-year interest-only grace period and a subsidized interest rate, or a five-year term with repayments in the form of retained transfers.  

To ensure compliance with the more favorable terms, municipalities had to produce a fiscal adjustment plan that would be scrutinized by the municipal council and therefore publicly reported. In other words, they had to choose between favorable terms made public or less advantageous terms kept private. 

Measuring blame

The researchers used several government sources to identify municipal election candidates and electoral results between 2008 and 2015, and analyze their budgets and expenditure. Government data was supplemented with over 21,800 national, regional and local news articles related to the program, with researchers measuring both the number of mentions of the program and the sentiment of the coverage. 

The merged data provided the researchers with comprehensive information about the vote shares of each party, the characteristics of the politicians standing for election, details of the adjustment plans, municipal revenue, spending and arrears.  

The results confirmed that there was a substantial increase in press coverage of the program when municipalities chose the public adjustment plan. The analysis also showed that new governments blamed their predecessors for the negative financial situations, and when incumbent governments chose public adjustment plans the opposition parties intensified their criticisms of government policy. 

Political trade-offs

The findings were backed up further by analyzing a survey of 125 Spanish mayors that had previously been carried out by Esade’s Associate Professor Pedro Rey Biel. 

The study emphasizes the positive effect of political turnover on government performance

The survey contained four prescient questions related to the research: whether the mayors would change policy if they believed it wasn’t working; whether they had ever done so; whether they didn’t correct mistakes because they believed opposition parties would use it against them; and whether they believed newcomers would be in a better position than incumbents to deal with financial troubles. 

While 90 percent of the mayors agreed they would change policy if it wasn’t working, only 50 percent said they had done so and a notable 20 percent said they wouldn’t correct past mistakes. Significantly more mayors than not believed new governments were better placed to navigate financial issues (37 percent and 13 percent respectively). 

The price of success

The survey analysis suggests that the politicians were aware of the trade-offs they made when implementing local policies, and that they believed that these trade-offs were simply the price of politics. 

Overall, the findings confirm that politicians are significantly less likely to choose the efficient option that benefits the populations they are elected to serve and will instead favor action that benefits them personally. Those new to office, however, are more likely to push for change that benefits the electorate.  

The research highlights the role of publicity in the decision-making process of elected officials and illustrates how past actions and electoral incentives lead to choices that benefit the party, not the people. It also emphasizes the positive effect of political turnover on government performance.