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Redistribution, Local Spending, and Growth: Evidence from the Origins of a Municipal Equalization Fund

Author

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  • Hansen, Casper Worm
  • Jensen, Peter Sandholdt

Abstract

This paper examines how intergovernmental transfers affect local government behavior and economic outcomes during the early stages of welfare state formation in Denmark. We exploit a 1937 reform that reimbursed municipal spending on social, medical, and school services (``MEF grants''). Using newly digitized annual panel data and a shift-share like IV strategy, we show that these grants expanded municipal budgets (crowding-in), reduced income inequality, and did not reduce average income or firm profitability. These findings contribute to long-standing debates on the equity-efficiency tradeoff and show that redistributive transfers can expand local welfare capacity without incurring significant growth costs.

Suggested Citation

  • Hansen, Casper Worm & Jensen, Peter Sandholdt, 2025. "Redistribution, Local Spending, and Growth: Evidence from the Origins of a Municipal Equalization Fund," CEPR Discussion Papers 20349, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20349
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    JEL classification:

    • N4 - Economic History - - Government, War, Law, International Relations, and Regulation
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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