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

28 Pages Posted: 4 Jan 2008 Last revised: 12 Sep 2018

See all articles by Sebastian Hauptmeier

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics

Date Written: 2007

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

JEL Classification: H72, H77

Suggested Citation

Hauptmeier, Sebastian, The Impact of Fiscal Equalization on Local Expenditure Policies - Theory and Evidence from Germany (2007). ZEW - Centre for European Economic Research Discussion Paper No. 07-081, Available at SSRN: https://ssrn.com/abstract=1080538 or http://dx.doi.org/10.2139/ssrn.1080538

Sebastian Hauptmeier (Contact Author)

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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