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

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  • Hauptmeier, Sebastian

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.

Suggested Citation

  • Hauptmeier, Sebastian, 2007. "The Impact of Fiscal Equalization on Local Expenditure Policies: Theory and Evidence from Germany," ZEW Discussion Papers 07-081, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  • Handle: RePEc:zbw:zewdip:7005
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    File URL: https://www.econstor.eu/bitstream/10419/24666/1/dp07081.pdf
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    References listed on IDEAS

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    1. Hindriks, Jean & Peralta, Susana & Weber, Shlomo, 2008. "Competing in taxes and investment under fiscal equalization," Journal of Public Economics, Elsevier, vol. 92(12), pages 2392-2402, December.
    2. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
    3. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
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    Cited by:

    1. Burret, Heiko Tobias & Bury, Yannick & Feld, Lars P., 2018. "Grenzabschöpfungsraten im deutschen Finanzausgleich," Freiburg Discussion Papers on Constitutional Economics 18/04, Walter Eucken Institut e.V..
    2. Thiess Büttner & Alexander Ebertz & Björn Kauder & Markus Reischmann, 2013. "Finanzwissenschaftliche Begutachtung des kommunalen Finanzausgleichs in Rheinland-Pfalz," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 58, October.
    3. Thiess Büttner & Fédéric Holm-Hadulla & Rüdiger Parsche & Christiane Starbatty, 2008. "Analyse und Weiterentwicklung des kommunalen Finanzausgleichs in Nordrhein-Westfalen," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 41, October.
    4. Sven Jari Stehn & Annalisa Fedelino, 2009. "Fiscal Incentive Effects of the German Equalization System," IMF Working Papers 09/124, International Monetary Fund.

    More about this item

    Keywords

    Fiscal competition; Fiscal equalization; Public inputs; Regression discontinuity approach; Germany;

    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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