Strategic interactions among Swedish local governments

Författare: Karin Edmark, Och

Sammanfattning av Dissertation series 2007:2

EDMARK, Karin, 2007, Strategic Interactions among Swedish Local Governments, Department of Economics, Uppsala University, Economic Studies 105, 141 pp, ISBN 978-91-85519-12-5.

This thesis consists of four self-contained essays.

Essay 1 (with Matz Dahlberg) investigates if local governments react on the welfare benefit levels in neighbouring 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-the-bottom" and that the effect is economically as well as statistically significant; if the neighbouring municipalities decrease their welfare benefit level by 100 SEK, a municipality decreases its benefit level with approximately 41 SEK. This result is robust to several alternative model specifications.

Essay 2 tests for strategic competition in public spending on childcare and primary education, and care for the elderly, using panel data on Swedish municipalities over 1996-2005. The high degree of decentralization in the organization of the public sector implies that Swedish data is highly suitable for this type of study. The study is not limited to interactions in the same type of expenditure, but also allows for effects across expenditures. The results give no robust support for the hypothesis that municipalities react on the spending policy of neighbouring municipalities in the decision on own spending on care of the elderly, childcare and education.

Essay 3 (with Hanna Ågren) uses data on Swedish local governments to test for strategic interaction in local tax setting. We make use of a number of indirect predictions from the theories of tax competition and yardstick competition in order to test for the presence of strategic interaction in these forms. Using such additional predictions of the theories serves a twofold purpose - first it helps us establish if the spatial coefficient is due to strategic 
interactions or merely reflecting spatial error correlation, and second, it helps identify the source of interaction. The analysis provides strong evidence for spatial correlation in tax rates among Swedish local governments. Moreover, we find weak evidence of tax competition effects in the setting of tax rates, while no evidence is found for yardstick competition.

Essay 4 tests for a migration response to the implementation of stricter rules for welfare benefit receipt, in the form of mandatory participation in activation programs for recipients of welfare, in Stockholm town districts. The hypothesis is that welfare benefit prone individuals will choose to live in a town district that has no program if they dislike the loss of leisure due to program participation more than they value the contents of the program, and vice versa.
The results give some indications of a negative effect of the program on the outmigration of welfare prone individuals. This is however not robust to changes neither in the comparison group nor in the sample of town districts. The conclusion that can be drawn is that there are no indications that the activation programs lead to outmigration of welfare prone individuals.