Title: The Political Economy of Local Governance: Fiscal Autonomy, Ideology, and Voter Satisfaction

Authors: 
Simona Ferraro - majandusanalüüsi ja rahanduse instituut, TalTech
Kaire Põder - Estonian Business School

Abstract:

This study examines the impact of financial autonomy and voter ideological position on municipal efficiency in Estonia after the administrative-territorial consolidation in 2017. Municipalities now play a larger role in service delivery and local development. In light of the reform, it is crucial to explore how geopolitical disruptions such as war and insecurity may foster political populism, thereby challenging the assumptions of the median voter theorem. We employ a two-stage data envelopment analysis covering 77 municipalities from 2021 to 2023 to test whether the voters' ideology and participation in local elections are affecting the satisfaction with public services such as education, recreational activities and transport. In addition, we apply the Malmquist index to assess efficiency trends over time. Our findings reveal that municipal efficiency in Estonia is shaped less by political coalitions and more by financial transfers and ideological dynamics. Financial transfers from the central government consistently enhance efficiency, demonstrating that central resources are crucial for effective service delivery. Right-wing support is associated with lower efficiency, while political extremism exerts only a fragile, short-term positive influence. Demographic factors contribute positively to efficiency, whereas institutional factors, such as alliances, show limited impact. Strengthening the design of intergovernmental transfers is therefore essential to ensure resources are used efficiently and equitably across municipalities, while addressing ideological divides requires fostering dialogue on fiscal autonomy and service delivery so as to align voter expectations with municipal capacities.

The public research seminars of the Department of Economics and Finance (DEF) at Tallinn University of Technology  usually take place on the second and fourth Wednesdays of the month onsite, unless announced otherwise. The seminar will last one hour, presentation will last approximately 45 minutes followed by 15 minutes of discussion. The seminars are held in English. Questions about the seminar can be sent to the seminar coordinators Karsten Staehr karsten.staehr@taltech.ee and Natalia Levenko natalia.levenko@taltech.ee.