The impact of fiscal equalization on local expenditure policies : theory and evidence from Germany

Hauptmeier, Sebastian

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URN: urn:nbn:de:bsz:180-madoc-18553
Document Type: Working paper
Year of publication: 2007
The title of a journal, publication series: None
Publication language: English
Institution: Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
MADOC publication series: Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject: 330 Economics
Classification: JEL: H77 H72 ,
Subject headings (SWD): Kommunaler Finanzausgleich , Steuerwettbewerb , Öffentliches Gut , Systemwettbewerb , Gemeindeausgaben , Deutschland
Individual keywords (German): Kommunaler Finanzausgleich , Steuerwettbewerb , Öffentliches Gut , Institutioneller Wettbewerb , Kommunale Ausgaben , Deutschland
Keywords (English): Fiscal competition , Fiscal equalization , Public inputs , Regression discontinuity approach , Germany
Abstract: This paper uses a simple model of fiscal competition in taxes and public inputs among local jurisdictions to analyze the incentive effects of fiscal equalization transfers. We find that a budget-compensated increase in the contribution rate to a system of fiscal equalization not only induces higher local tax rates (e.g., Koethenbuerger, 2002; Bucovetsky and Smart, 2006) but also lower budgetary shares of the public input to production. The subsequent empirical analysis is based on a rich data set of German municipalities and provides strong evidence for the existence of an incentive of fiscal equalization transfers on local expenditure policies.
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