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Is There a "Race-to-the-Bottom" in the Setting of Welfare Benefit Levels? Evidence from a Policy Intervention

  • Karin Edmark
  • Matz Dahlberg

In this paper we investigate whether local governments react on the welfare benefit levels in neighboring jurisdictions when setting their own benefit levels. We solve the simultaneity problem arising from the welfare game by utilizing a policy intervention; more specifically, we use a centrally geared exogenous placement of a highly welfare prone group (refugees) among Swedish municipalities as an instrument. The IV estimates indicate that there exists a "race-to-the-bottom" and that the effect is economically as well as statistically significant; if the neighboring municipalities decrease their welfare benefit level with 100 SEK, a municipality decreases its benefit level with approximately 65 SEK. This result seems to be robust to several alternative model specifications

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 473.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:473
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