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Property taxation as incentive for cost control: Empirical evidence for utility services in Norway

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Lars-Erik Borge ()
Jørn Rattsø ()

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Abstract

Cost control in the public sector is a challenge for political institutions. Theoretical research recently has shown incentive effects of property taxation that can work as a mechanism to hold costs down. We are able to investigate the empirical relevance of this proposition, since local governments in Norway represent a kind of natural experiment where about 30% of them have residential property tax. The framework of the analysis is a bureau producing public services for the local government, and control of slack is related to the budget constraint of the bureau. High costs are understood as the result of an agency problem. In a stylized model of this interaction, we show that property taxation increases the local government budget responsiveness to higher costs if housing demand is not ‘too’ elastic. Both complimentarity between service supply and housing demand and migration equilibrium contribute to the negative relationship hypothesized between the property tax base and the reported costs of the bureau. The econometric analysis confirms significant differences in unit costs dependent on tax structure. Existence of property taxation seems to help overcome the agency problem and reduce costs. The potential problems of endogeneity of the choice of property taxation and unequal comparisons are handled with instrument variables and matching.

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Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa03p219.

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Date of creation: Aug 2003
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Handle: RePEc:wiw:wiwrsa:ersa03p219

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jørn Rattsø & Jon Hernes Fiva, 2005. "Decentralization with Property Taxation to Improve Incentives: Evidence from Local Governments’ Discrete Choice," Working Paper Series 5305, Department of Economics, Norwegian University of Science and Technology, revised 02 Sep 2005. [Downloadable!]
  2. Boadway, Robin & Horiba, Isao & Jha, Raghbendra, 1999. " The Provision of Public Services by Government Funded Decentralized Agencies," Public Choice, Springer, vol. 100(3-4), pages 157-84, September. [Downloadable!] (restricted)
  3. Jon H. Fiva and Marte Rønning, 2006. "The Incentive Effects of Property Taxation: Evidence from Norwegian School Districts," Discussion Papers 484, Research Department of Statistics Norway. [Downloadable!]
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  4. John Douglas Wilson & Roger H. Gordon, 2003. "Expenditure Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 399-417, 04. [Downloadable!] (restricted)
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  5. Falch, Torberg & Rattso, Jorn, 1999. "Local public choice of school spending: disaggregating the demand function for educational services," Economics of Education Review, Elsevier, vol. 18(3), pages 361-373, June. [Downloadable!] (restricted)
  6. Hoxby, Caroline M., 1999. "The productivity of schools and other local public goods producers," Journal of Public Economics, Elsevier, vol. 74(1), pages 1-30, October. [Downloadable!] (restricted)
  7. Cullis, J G & Jones, P R & Morrissey, O, 1991. "Public Choice Perspectives on the Poll Tax," Economic Journal, Royal Economic Society, vol. 101(406), pages 600-614, May. [Downloadable!] (restricted)
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  9. Glaeser, Edward L, 1996. " The Incentive Effects of Property Taxes on Local Governments," Public Choice, Springer, vol. 89(1-2), pages 93-111, October.
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  10. Lars-Erik Borge & Linn Renée Naper, 2006. "Efficiency Potential and Efficiency Variation in Norwegian Lower Secondary Schools," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(2), pages 221-249, June. [Downloadable!] (restricted)
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  11. James M. Poterba, 1996. "Demographic Structure and the Political Economy of Public Education," NBER Working Papers 5677, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Borge, Lars-Erik & Rattso, Jorn, 2003. "The Relationships Between Costs and User Charges: The Case of a Norwegian Utility Service," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  13. Borge, Lars-Erik & Rattso, J.Jorn, 2004. "Income distribution and tax structure: Empirical test of the Meltzer-Richard hypothesis," European Economic Review, Elsevier, vol. 48(4), pages 805-826, August. [Downloadable!] (restricted)
  14. Roger H. Gordon & John D. Wilson, 1999. "Tax Structure and Government Behavior: Implications for Tax Policy," NBER Working Papers 7244, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Sascha O. Becker & Andrea Ichino, 2002. "Estimation of average treatment effects based on propensity scores," Stata Journal, StataCorp LP, vol. 2(4), pages 358-377, November. [Downloadable!]
  16. Niskanen, William A, 1975. "Bureaucrats and Politicians," Journal of Law & Economics, University of Chicago Press, vol. 18(3), pages 617-43, December.
  17. Joshua D. Angrist, 1998. "Estimating the Labor Market Impact of Voluntary Military Service Using Social Security Data on Military Applicants," Econometrica, Econometric Society, vol. 66(2), pages 249-288, March.
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  18. Torsten Persson, 2001. "Currency unions and trade: how large is the treatment effect?," Economic Policy, CEPR, CES, MSH, vol. 16(33), pages 433-462, October. [Downloadable!] (restricted)
  19. James M. Poterba, 1995. "State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics," NBER Working Papers 4375, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Lars-Erik Borge & Jørn Rattsø, 2005. "The Relationships between Cost and User Charges: The Case of the Norwegian Utility Service," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(1), pages 98-, March.
  21. Persson, Torsten & Tabellini, Guido, 2002. "Do constitutions cause large governments? Quasi-experimental evidence," European Economic Review, Elsevier, vol. 46(4-5), pages 908-918, May. [Downloadable!] (restricted)
  22. Jorid Kalseth & Jørn Rattsø, 1998. "Political Control of Administrative Spending: The Case of Local Governments in Norway," Economics and Politics, Blackwell Publishing, vol. 10(1), pages 63-83, 03. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jon H. Fiva and Marte Rønning, 2006. "The Incentive Effects of Property Taxation: Evidence from Norwegian School Districts," Discussion Papers 484, Research Department of Statistics Norway. [Downloadable!]
    Other versions:
  2. Borge, Lars-Erik & Rattso, Jorn, 2001. "Income Distribution and Tax Structure: Microeconomic Test of the Meltzer-Richard Hypothesis," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Jørn Rattsø & Jon Hernes Fiva, 2005. "Decentralization with Property Taxation to Improve Incentives: Evidence from Local Governments’ Discrete Choice," Working Paper Series 5305, Department of Economics, Norwegian University of Science and Technology, revised 02 Sep 2005. [Downloadable!]
  4. Marte Rønning & Jon Hernes Fiva, 2004. "Property Taxation as a Determinant of School District Efficiency," Working Paper Series 5105, Department of Economics, Norwegian University of Science and Technology, revised 14 Jul 2005. [Downloadable!]
  5. Borge, Lars-Erik & Rattso, Jorn, 2003. "The Relationships Between Costs and User Charges: The Case of a Norwegian Utility Service," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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