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Religious Heterogeneity and Fiscal Policy: Evidence from German Reunification

  • Ronny Freier
  • Benny Geys
  • Joshua Holm

Theoretical work based on social identity theory and in-group favoritism predicts that increased population diversity (e.g., due to immigration) reduces support for redistributive public policies. In this article, we add to the empirical literature testing this prediction in three ways. First, rather than ethno-linguistic or racial heterogeneity, we analyze religious diversity, which in many countries is an increasingly important source of diversity. Second, to account for the potential endogeneity of heterogeneity, we analyze an exogenous shock in diversity due to the German reunification. Finally, we assess shifts in local individuals' social identification after immigration took place, which, while untested in previous contributions, is a critical theoretical mechanism. Our results - using tax and spending decisions of 2031 Bavarian municipalities over the 1983-2005 period - indicate that Catholic municipalities in particular significantly reduced their level of taxes and spending in response to non-Catholic immigration. These effects arise only after the first post-reunification local elections, suggesting a critical mediating role of the democratic process.

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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1266.

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Length: 44 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwwpp:dp1266
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  1. Habyarimana, James P. & Humphreys, Macartan & Posner, Daniel N. & Weinstein, Jeremy, 2006. "Why Does Ethnic Diversity Undermine Public Goods Provision? An Experimental Approach," IZA Discussion Papers 2272, Institute for the Study of Labor (IZA).
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  6. Burchardi, Konrad B. & Hassan, Tarek, 2011. "The Economic Impact of Social Ties: Evidence from German Reunification," CEPR Discussion Papers 8470, C.E.P.R. Discussion Papers.
  7. Lindqvist, Erik, 2008. "Identity and Redistribution," Working Paper Series 735, Research Institute of Industrial Economics.
  8. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
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  10. Pommerehne, Werner W., 1978. "Institutional approaches to public expenditure : Empirical evidence from Swiss municipalities," Journal of Public Economics, Elsevier, vol. 9(2), pages 255-280, April.
  11. Romer, Thomas & Rosenthal, Howard, 1979. "Bureaucrats versus Voters: On the Political Economy of Resource Allocation by Direct Democracy," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 563-87, November.
  12. Holger Stichnoth & Karine Van der Straeten, 2013. "Ethnic Diversity, Public Spending, And Individual Support For The Welfare State: A Review Of The Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 27(2), pages 364-389, 04.
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  14. Feld, Lars P. & Kirchgassner, Gebhard, 2000. "Direct democracy, political culture, and the outcome of economic policy: a report on the Swiss experience," European Journal of Political Economy, Elsevier, vol. 16(2), pages 287-306, June.
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