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The Impact of Fiscal Equalization on Local Expenditure Policies: Theory and Evidence from Germany

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Author Info
Hauptmeier, Sebastian

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Abstract

This paper uses a simple model of fiscal competition in taxes and public inputs among local jurisdictions to analyze the incentive effects of fiscal equalization transfers. We find that a budget-compensated increase in the contribution rate to a system of fiscal equalization not only induces higher local tax rates (e.g., Koethenbuerger, 2002; Bucovetsky and Smart, 2006) but also lower budgetary shares of the public input to production. The subsequent empirical analysis is based on a rich data set of German municipalities and provides strong evidence for the existence of an incentive of fiscal equalization transfers on local expenditure policies. --

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Publisher Info
Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 07-081.

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Date of creation: 2007
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Handle: RePEc:zbw:zewdip:7005

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Related research
Keywords: Fiscal competition; Fiscal equalization; Public inputs; Regression discontinuity approach; Germany;

Find related papers by JEL classification:
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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