Political budget cycle and the alignment effect: Evidence from South Korea

Abstract

This study examines the effect of political alignment on the political budget cycle in multi-level local governments (municipal and regional governments). The central government may increase transfers to politically unaligned municipalities before local elections if (1) these municipalities are part of politically aligned regions and (2) the alignment of regional incumbents determines the political fate of the president. To formalize this hypothesis, we present a simple political agency model of multi-level governments. Using data from 226 Korean municipalities within 16 regions, and a regression discontinuity design, we find that, during local election years, the central government increases discretionary subsidies to municipalities that are part of aligned regions. In particular, subsidies increase significantly before local elections in unaligned municipalities if they are located in aligned regions. Finally, an increase in subsidies increases the regional vote share obtained by the ruling party.