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Religious Heterogeneity and Fiscal Policy: Evidence from German Reunification

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  • Ronny Freier
  • Benny Geys
  • Joshua Holm

Abstract

Theoretical work based on social identity theory and in-group favoritism predicts that increased population diversity (e.g., due to immigration) reduces support for redistributive public policies. In this article, we add to the empirical literature testing this prediction in three ways. First, rather than ethno-linguistic or racial heterogeneity, we analyze religious diversity, which in many countries is an increasingly important source of diversity. Second, to account for the potential endogeneity of heterogeneity, we analyze an exogenous shock in diversity due to the German reunification. Finally, we assess shifts in local individuals' social identification after immigration took place, which, while untested in previous contributions, is a critical theoretical mechanism. Our results - using tax and spending decisions of 2031 Bavarian municipalities over the 1983-2005 period - indicate that Catholic municipalities in particular significantly reduced their level of taxes and spending in response to non-Catholic immigration. These effects arise only after the first post-reunification local elections, suggesting a critical mediating role of the democratic process.

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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1266.

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Length: 44 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwwpp:dp1266

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Keywords: local identity; fiscal policy; redistribution; German reunification; diff-in-diff estimation;

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  1. Romer, Thomas & Rosenthal, Howard, 1979. "Bureaucrats versus Voters: On the Political Economy of Resource Allocation by Direct Democracy," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 563-87, November.
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  8. Habyarimana, James P. & Humphreys, Macartan & Posner, Daniel N. & Weinstein, Jeremy, 2006. "Why Does Ethnic Diversity Undermine Public Goods Provision? An Experimental Approach," IZA Discussion Papers 2272, Institute for the Study of Labor (IZA).
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  11. Feld, Lars P. & Kirchgassner, Gebhard, 2000. "Direct democracy, political culture, and the outcome of economic policy: a report on the Swiss experience," European Journal of Political Economy, Elsevier, vol. 16(2), pages 287-306, June.
  12. Baqir, Reza & Easterly, William & Alesina, Alberto, 1999. "Public Goods and Ethnic Divisions," Scholarly Articles 4551797, Harvard University Department of Economics.
  13. Holger Stichnoth & Karine Van der Straeten, 2013. "Ethnic Diversity, Public Spending, And Individual Support For The Welfare State: A Review Of The Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 27(2), pages 364-389, 04.
  14. Woojin Lee & John Roemer & Karine van der Straeten, 2005. "Racism, xenophobia, and redistribution," UMASS Amherst Economics Working Papers 2005-15, University of Massachusetts Amherst, Department of Economics.
  15. Erik Lindqvist & Robert Östling, 2013. "Identity and redistribution," Public Choice, Springer, vol. 155(3), pages 469-491, June.
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