Distance matters: Geographical proximity and fiscal rules enforcement

A reform in the German state of Hesse selectively shifted the responsibility for overseeing and enforcing a balanced budget rule at the municipal level. Oversight was transferred from politically affiliated county administrators to non-political and potentially more impartial fiscal supervisors at a higher administrative layer. We use this institutional change to empirically examine whether enforcement under the former regime was affected by hidden bias related to geographic proximity. We find that municipalities located closer to the former political supervisors reduced their cash loans more strongly under the subsequent neutral regime, consistent with the existence of proximity-related favoritism prior to the reform. This spatial pattern is most evident for smaller municipalities, when supervisors oversee more municipalities, and when mayors and supervisors are not politically aligned. • Compliance with fiscal rules is not necessarily automatic and enforcement matters. • We empirically analyze how geographical proximity influences oversight intensity. • Results suggest that nearby municipalities faced softer restrictions. • Strong spatial effect for small municipalities and many-jurisdiction supervisors. • Shared party ties remove the effect of geographical proximity.