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How Federalism Protects Future Generations from Today's Public Debts


  • Eichenberger Reiner

    () (University of Fribourg and CREMA — Center for Research in Economics, Management and the Arts)

  • Stadelmann David

    () (University of Fribourg and CREMA — Center for Research in Economics, Management and the Arts)


From the politico-economic perspective, federalism is a protector of the present generation. But what about future generations? In federal states, Ricardian equivalence cannot be assumed to work properly, as migration between local jurisdictions undermines intergenerational redistribution based on parental altruism. However, we argue that there exists another equivalence mechanism which also works with purely selfish individuals: Public debts capitalize into property values. Jurisdictions with larger net debts exhibit, ceteris paribus, lower property prices. Debt capitalization in property values is the more pronounced the less elastic land supply is and the more mobile the other factors of production are. Therefore, capitalization is more relevant for local than for national debts, i.e. it is more pronounced in a federal than in a centralized state. Thus, federalism also becomes a protector of future generations.

Suggested Citation

  • Eichenberger Reiner & Stadelmann David, 2010. "How Federalism Protects Future Generations from Today's Public Debts," Review of Law & Economics, De Gruyter, vol. 6(3), pages 395-420, December.
  • Handle: RePEc:bpj:rlecon:v:6:y:2010:i:3:n:5

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    References listed on IDEAS

    1. Sandra E. Black, 1999. "Do Better Schools Matter? Parental Valuation of Elementary Education," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 577-599.
    2. Dennis Epple & Holger Sieg, 1999. "Estimating Equilibrium Models of Local Jurisdictions," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 645-681, August.
    3. Brueckner, Jan K., 1979. "Property values, local public expenditure and economic efficiency," Journal of Public Economics, Elsevier, vol. 11(2), pages 223-245, March.
    4. Patrick Bajari & Matthew E. Kahn, 2005. "Estimating Housing Demand With an Application to Explaining Racial Segregation in Cities," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 20-33, January.
    5. Kenneth Y. Chay & Michael Greenstone, 2005. "Does Air Quality Matter? Evidence from the Housing Market," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 376-424, April.
    6. Reiner Eichenberger & Mark Schelker, 2007. "Independent and competing agencies: An effective way to control government," Public Choice, Springer, vol. 130(1), pages 79-98, January.
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    Cited by:

    1. David Stadelmann & Reiner Eichenberger, 2014. "Public debts capitalize into property prices: empirical evidence for a new perspective on debt incidence," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(3), pages 498-529, June.
    2. Micheli, Martin, 2016. "Local governments' indebtedness and its impact on real estate prices," Ruhr Economic Papers 605, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    3. Robert C. MacKay, 2014. "Implicit Debt Capitalization in Local Housing Prices: An Example of Unfunded Pension Liabilities," National Tax Journal, National Tax Association, vol. 67(1), pages 77-112, March.
    4. Dashle Kelley, 2014. "The political economy of unfunded public pension liabilities," Public Choice, Springer, vol. 158(1), pages 21-38, January.

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