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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

    ()

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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Citations

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Cited by:
  1. Maura Francese & Massimiliano Piacenza & Marzia Romanelli & Gilberto Turati, 2012. "Understanding Inappropriateness in Health Care. The Role of Supply Structure, Pricing Policies and Political Institutions in Caesarean Deliveries," Working papers, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino 001, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
  2. Paolo Liberati & Agnese Sacchi, 2010. "Tax Decentralisation and local Government size," Departmental Working Papers of Economics - University 'Roma Tre', Department of Economics - University Roma Tre 0123, Department of Economics - University Roma Tre.
  3. Lars-Erik Borge & Jørn Rattsø, 2001. "Income Distribution and Tax Structure: Microeconomic Test of the Meltzer-Richard Hypothesis," CESifo Working Paper Series, CESifo Group Munich 543, CESifo Group Munich.
  4. Marte Rønning & Jon Hernes Fiva, 2004. "Property Taxation as a Determinant of School District Efficiency," Working Paper Series, Department of Economics, Norwegian University of Science and Technology 5105, Department of Economics, Norwegian University of Science and Technology, revised 14 Jul 2005.
  5. Agnese Sacchi & Simone Salotti, 2014. "The influence of decentralized taxes and intergovernmental grants on local spending volatility," Working Papers, Universidade de Vigo, GEN - Governance and Economics research Network 1405, Universidade de Vigo, GEN - Governance and Economics research Network.
  6. Sánchez-Braza, Antonio & Pablo-Romero, María del P., 2014. "Evaluation of property tax bonus to promote solar thermal systems in Andalusia (Spain)," Energy Policy, Elsevier, Elsevier, vol. 67(C), pages 832-843.
  7. Lars-Erik Borge & Jørn Rattsø, 2003. "The Relationships Between Costs and User Charges: The Case of a Norwegian Utility Service," CESifo Working Paper Series, CESifo Group Munich 1033, CESifo Group Munich.
  8. Andrea Filippo Presbitero & Agnese Sacchi & Alberto Zazzaro, 2014. "Property Tax and Fiscal Discipline in OECD Countries," Mo.Fi.R. Working Papers, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences 95, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  9. Jørn Rattsø & Jon Hernes Fiva, 2005. "Decentralization with Property Taxation to Improve Incentives: Evidence from Local Governments’ Discrete Choice," Working Paper Series, Department of Economics, Norwegian University of Science and Technology 5305, Department of Economics, Norwegian University of Science and Technology, revised 02 Sep 2005.
  10. Jon H. Fiva & Marte Rønning, 2006. "The Incentive Effects of Property Taxation: Evidence from Norwegian School Districts," Discussion Papers, Research Department of Statistics Norway 484, Research Department of Statistics Norway.
  11. Sergio Beraldo & Massimiliano Piacenza & Gilberto Turati, 2012. "Fiscal Decentralization In Weak Institutional Environments," Post-Print, HAL halshs-00706970, HAL.

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