DP18313 Government Turnover and External Financial Assistance
We study the political incentives shaping governments' decisions to seek assistance from a lender of last resort. We propose that re-elected incumbents are more reluctant than newly elected governments to request assistance, as this action reveals negative information about their past performance. We first provide cross-country descriptive evidence that a change in office is indeed associated with a larger probability of receiving assistance from the IMF. Next, to obtain causal evidence, we analyze the decisions made by 4,000 Spanish municipalities following a credit shock during the Great Recession. Regression-discontinuity estimates show that newly elected local executives were approximately 30 percentage points more likely than re-elected incumbents to publicly agree on a financing program with the national government. Using data from press reports, electoral results and a survey on politicians' views, we show that many re-elected incumbents avoided requesting a public bailout to protect their image, even though this decision was financially suboptimal.