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
Date Written: 2007
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
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