RULES VERSUS HOME RULE LOCAL GOVERNMENT RESPONSES TO NEGATIVE REVENUE SHOCKS

Local governments rely heavily on sales tax revenue. We use national bankruptcies of big-box retail chains to study sudden plausibly exogenous decreases in this type of revenue. Treated localities respond by reducing spending on law enforcement and administrative services. We further study how cities with different degrees of autonomy vary in their response. Cities in home rule states, who have greater autonomy, react more swiftly by raising other types of revenue. A regression discontinuity analysis of cities in Illinois, where home rule status is triggered by crossing a population threshold, shows that this effect of local autonomy is causal: home rule leads to smaller revenue drops and stronger bond ratings.