Understanding Public Participation as a Mechanism Affecting Government Fiscal Outcomes: Theory and Evidence from Participatory Budgeting

This study aims to advance our knowledge about the role of public participation in formulating budgetary decisions of local governments. By focusing on participatory budgeting as a prominent form of public participation in the budgetary process, we posit that participatory budgeting serves two important roles in aligning the fiscal outcomes of local governments with citizen preferences: (1) increased transparency of the local budget and (2) improved budget literacy of citizens. This study investigates a link between participatory budgeting and the fiscal outcomes of local governments by utilizing data drawn from Korean local governments for seven fiscal years. Employing instrumental variable regression to address endogeneity, there is strong evidence that public participation and deliberation during the participatory budgeting process have a positive association with the fiscal balance. There is also weak evidence that the authority delegated to participatory budgeting participants affects the fiscal balance. The findings of this study imply that it is the quality of public participation that matters in holding the government accountable for its fiscal decisions.