Participatory Budgeting and Fiscal Transparency of Local Governments: Moderating Effect of Political Competition

Abstract

Citizen participation in fiscal decision making process is to enhance fiscal transparency and accountability of local governments. Under the double-entry bookkeeping system, however, executives have a great deal of discretion in estimating accounting numbers and have political incentives to manage fiscal performance. Hence, citizen participation may not always improve transparency and accountability. Drawing from accrual-based financial statement data of 220 Korean local governments during 2015 - 2018, we examine the effect of citizen participation on the financial reporting quality. We find that the level of participatory budgeting institution is not significantly associated with financial reporting quality measured by allowances for uncollectible taxes. However, when we divide the sample into municipalities under weak versus strong political competition, we find asymmetric effect of participatory budgeting on financial reporting quality, Under the weak political pressure, the level of participatory budgeting institution is positively associated with financial reporting quality. In contrast, under the strong political pressure, the degree of citizen participation is insignificantly associated with the financial reporting quality. Empirical findings suggest that political competition may dampen the positive effect of participatory budgeting on financial reporting quality by encouraging incumbent mayors to impede citizen councillors’ monitoring on budgeting and reporting process.