Is there a “race-to-the-bottom” in the setting of welfare benefit levels? Evidence from a policy intervention

Abstract

In this paper we investigate whether local governments react on the welfare benefit levels in neighboring jurisdictions when setting their own benefit levels.We solve the simultaneity problem arising from the welfare game by utilizing a policy intervention; more specifically, we use a centrally geared exogenous placement of a highly welfare prone group (refugees) among Swedish municipalities as an instrument. The IV estimates indicate that there exists a "race-to-thebottom" and that the effect is economically as well as statistically significant; if the neighboring municipalities decrease their welfare benefit level with 100 SEK, a municipality decreases its benefit level with approximately 65 SEK. This result seems to be robust to several alternative model specifications.

Ethnic Diversity and Preferences for Redistribution

“…If many refugees ended up in a different municipality than where they were initially placed, our instrument measuring the number of refugees placed in the municipality within the program would be poorly defined. Dahlberg and Edmark (2008) investigate the extent of refugee migration and come to the conclusion that around 40 percent indeed lived in a different municipality than where they were initially placed four years later, and of these the vast majority had moved to one of the three large cities (Stockholm, Göteborg and Malmö) and their surrounding areas. As a robustness check of the baseline results presented in Table 2, we therefore estimate the model while excluding the 250 respondents living in these three municipalities.…”

“…This is not the first study to exploit the exogenous variation that the refugee placement program generated. Two examples, each with a different angle from ours, are Dahlberg and Edmark (2008) and Edin et al (2003). The former uses the placement program to isolate exogenous variation in from the policy-bundling effect that operates via political parties.…”

Tax competition among local governments: Evidence from a property tax reform in Finland

“…3 Eugster and Parchet (2011) use a regression discontinuity approach to study tax competition in Swiss municipalities around the French/German language border. 4 Dahlberg and Edmark (2008) use a Swedish policy intervention as a source of exogenous variation in welfare benefit levels to study "race-to-the-bottom" in welfare benefits. Wilson (1999) surveys theoretical literature on tax competition and divides tax competition models into two main categories.…”

Geografiscal federalism

“…Dahlberg and Edmark (2008) test the race to the bottom hypothesis on benefit levels in Sweden. Birkelof (2009Birkelof ( , 2010 studies Swedish municipalities' expenditures on services directed to people with major and long-term functional disabilities, and finds that spatial dependence in spending per capita on those services decreases substantially after the introduction of an equalization grant mechanism that relies on standardized provision costs.…”