Debt Capitalization: A New Perspective on Ricardian Equivalence

David Stadelmann and Reiner Eichenberger ()

CREMA Working Paper Series from Center for Research in Economics, Management and the Arts (CREMA)

Abstract: Rational individuals know that present government debts transform into higher future taxes. The Ricardian equivalence implies that the burden of the debt is not shifted between generations because of compensating intergenerational transfers. While the assumptions for Ricardian equivalence to hold are quite demanding, we argue that there exists another equivalence mechanism which works also with non-altruistic individuals: Public debts capitalize into property values. Thus, communities with larger net debts exhibit, ceteris paribus, lower property prices. We provide empirical evidence for debt capitalization using unique data for the Swiss metropolitan area of Zurich.

Keywords: Capitalization; Public Debts; Ricardian Equivalence; Taxes; Local Public Goods (search for similar items in EconPapers)
JEL-codes: H00 H74 R51 (search for similar items in EconPapers)
Date: 2008-11
New Economics Papers: this item is included in nep-geo, nep-pbe, nep-pub and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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