The Ricardian Equivalence Versus Debt Capitalization in Local Public Finance

41 Pages Posted: 30 Jan 2008

See all articles by David Stadelmann

David Stadelmann

University of Bayreuth - Faculty of Law, Business and Economics; CREMA

Reiner Eichenberger

University of Fribourg - Faculty of Economics and Social Science; CREMA

Date Written: January 29, 2008

Abstract

Rational and forward-looking individuals know that government debts today mean higher taxes in the future. The Ricardian equivalence at the national level implies that the burden of the debt cannot be shifted between generations as intergenerational transfers allow the future generation to pay back the debts. We argue that at the local level a similar equivalence holds even for non-altruistic individuals but works through a different channel: Landed property persists over time and fiscal differences are capitalized in property values. Our theoretical model predicts that communities with a more favorable asset/debt structure have, ceteris paribus, higher property prices. We confirm these predictions empirically using a panel dataset for communities in the Swiss metropolitan area of Zurich.

Keywords: Capitalization, Taxes, Local Public Goods, Ricardian Equivalence

JEL Classification: R21, R51, H74

Suggested Citation

Stadelmann, David and Eichenberger, Reiner, The Ricardian Equivalence Versus Debt Capitalization in Local Public Finance (January 29, 2008). Available at SSRN: https://ssrn.com/abstract=1088261 or http://dx.doi.org/10.2139/ssrn.1088261

David Stadelmann (Contact Author)

University of Bayreuth - Faculty of Law, Business and Economics ( email )

Universitätsstraße 30
Bayreuth, 95447
Germany

CREMA ( email )

Gellertstrasse 18
Basel
Zurich, CH 8006
Switzerland

Reiner Eichenberger

University of Fribourg - Faculty of Economics and Social Science ( email )

Fribourg, CH 1700
Switzerland

CREMA ( email )

Gellertstrasse 18
Basel
Zurich, CH 8006
Switzerland

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