Do Parties Matter for Economic Outcomes? A Regression-Discontinuity Approach

A long-standing issue in political economics is to what extent party control makes a difference in determining fiscal and economics policies. This question is very difficult to answer empirically because parties are not randomly selected to govern political entities. This article uses a regression-discontinuity design, namely, party control changes discontinuously at 50% of the vote share, which can produce "near" experimental causal estimates of the effect of party control on economic outcomes. The method is applied to a large panel data set from Swedish local governments with a number of attractive features. The results show that there is an economically significant party effect: Left-wing governments spend and tax 2-3% more than right-wing governments. Left-wing governments also have 7% lower unemployment rates, which is partly due to that left-wing governments employ 4% more workers than right-wing governments. (JEL: C21, D72, D78, H71, H72) (c) 2008 by the European Economic Association.