In this paper we investigate whether local governments react on the welfare benefit levels in neighboring jurisdictions when setting their own benefit levels. We solve the simultaneity problem arising from the welfare game by utilizing a policy intervention; more specifically, we use a centrally geared exogenous placement of a highly welfare prone group (refugees) among Swedish municipalities as an instrument. The IV estimates indicate that there exists a "race-to-the-bottom" and that the effect is economically as well as statistically significant; if the neighboring municipalities decrease their welfare benefit level with 100 SEK, a municipality decreases its benefit level with approximately 59 SEK. This result is robust to several alternative model specifications.
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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number
2004:19.
Length: 34 pages Date of creation: 24 Nov 2004 Date of revision: Handle: RePEc:hhs:uunewp:2004_019
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Find related papers by JEL classification: C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data D60 - Microeconomics - - Welfare Economics - - - General H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
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