What is Fiscal Illusion

The chapter seeks to contribute to the literature on determinants of local government election by adopting a different perspective focused on the effects of financial indicators on the elections of mayors. Using the agency and the public choice theory, this study implements a model where specific financial indicators—whose selection takes into account the increased autonomy and responsibility of local politicians—have been included to document their effect on mayoral re-election. Focusing on the Italian context, the chapter examines a sample of 129 municipalities during the period 2008-2014, where several elections were held. By using different estimators, findings indicate that the re-election of mayors is affected by the level of indebtedness and the current equilibrium. In addition, current spending is better valued by citizens/voters than capital expenditure, which increases the probability of being re-elected.