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Creative Destruction and Fiscal Institutions: A Long-Run Case Study of Three Regions

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Author Info
Jan Schnellenbach
Thushyanthan Baskaran
Lars P. Feld

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Abstract

We analyze the rise and decline of the steel and mining industries in the regions of Saarland, Lorraine und Luxemburg over a long period, from the mid-19th century to 2003. Our main focus in on the period of structural decline in these industries after the second world war. Differences in the institutional framework of these regions are exploited to analyze how the broader fiscal constitution sets incentives for governments to either obstruct or to encourage structural change in the private sector. Our main result is that fiscal autonomy of a region subjected to structural change in its private sector is associated with a relatively faster decline of employment in the sectors affected. Contrary to the political lore, fiscal transfers are not used to speed up the destruction of old sectors, but rather to stabilize incomes.

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Paper provided by Max Planck Institute of Economics, Evolutionary Economics Group in its series Papers on Economics and Evolution with number 2009-08.

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Date of creation: Aug 2009
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Handle: RePEc:esi:evopap:2009-08

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Related research
Keywords: structural change; fiscal federalism; grants in aid; creative destruction Length 31 pages;

Find related papers by JEL classification:
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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