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

Sebastian Hauptmeier

No 07-081, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

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.

Keywords: Fiscal competition; Fiscal equalization; Public inputs; Regression discontinuity approach; Germany (search for similar items in EconPapers)
JEL-codes: H72 H77 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:7005

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