19.12.2017; Kolloquium

Fakultätskolloquium - Municipal Finance, Land Use and Spatial Interdependence

18:15 - 19:45 Uhr
Festsaal der Fakultät Wirtschaftswissenschaften, Hülsse-Bau, Nordflügel, 3. Etage
Helmholtztstr. 10, 01069 Dresden
Sebastian Langer (IÖR)

Abstract: In Germany, equalization transfers from higher-level budgets (“Zuweisungen”) play an important role as a source of revenue for municipal budgets. The main type of transfers, so called non-matching or general-purpose transfers have a lump-sum character and are allocated on the basis of a formula that compares fiscal need and fiscal capacity. The economic effects of such transfers have been extensively studied both theoretically and empirically. According to median voter theory, the effect on local government expenditures from changes in lump-sum intergovernmental transfers and from changes in private incomes should be equal (Bradford and Oates, 1971a/ b). In empirical terms, however, many authors find that compared to a rise in revenue from other sources there is a stronger increase in public spending in response to a rise in lump-sum intergovernmental transfers. This is the so-called “flypaper effect” (Oates, 1988, p. 77).

We investigate the effect of general-purpose transfers on the total expenditures, eight different expenditure categories as well as property and business tax rates in the municipalities of North Rhine-Westphalia (Germany). Endogeneity is addressed by applying the instrumental variables method, where exogenous shocks from two adjustments of the weighting function used to determine the fiscal needs of the municipalities are used as instrumental variables. Findings suggest the existence of the “flypaper effect” – municipalities use transfers to increase expenditures but do not reduce tax rates. Extra money from transfers is mainly used to finance social expenditures. A set of robustness checks, is performed to validate the results.

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Uta Schwarz
Letzte Änderung: 09.10.2017