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

A long-standing issue in political economics is whether party control makes a difference in determining fiscal and economics policies. This question is very difficult to answer empirically since parties are not randomly selected to govern political entities. This paper uses a regression-discontinuity design, i.e., party control changes discontinuously at 50 percent 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 percent more than right-wing governments. Left-wing governments also have 7 percent lower unemployment rates, which is partly due to that left-wing governments employ 4 percent more workers than right-wing governments.