Irene Brunetti (INAPP)
Marco Leonardi and Andrea Ricci
We study the effects of municipal balanced-budget rules on public procurement and wages in Italy. In 2012 the central government tightened the Domestic Stability Pact (DSP), increasing the stringency of budget constraints for municipalities with at least 5,000 residents while leaving smaller municipalities exempt from this additional wave of austerity. Exploiting this reform in a difference-in-discontinuities design around the 5,000-resident threshold, and combining municipal balance-sheet data with administrative information on tenders and subcontracting firms, we show that treated municipalities react by scaling down public works procurement: they rely less on tenders, auction smaller contract amounts, and lengthen completion times relative to exempt municipalities. Using social security records, we find no detectable effect of the reform on total employment or average wages at the municipal level. However, when we link tenders to winning firms and their subcontractors, we document a significant decline in wages paid to employees of subcontracting firms operating in treated municipalities. These results suggest that stricter balanced-budget rules can shift the burden of local austerity along the procurement chain, leaving aggregate local labor-market outcomes almost unaffected while compressing wages in the lower tiers of suppliers.