No. 7/2004
WELFARE COMPETITION IN NORWAY
Jon Hernes Fiva
Jørn Rattsø
Abstract:
Local redistribution policy creates incentives for welfare migration
that may result in
'underprovision' or even a 'race to the bottom'. This paper evaluates
the empirical importance of welfare competition. Our contribution is to
separate between the policy decision and the actual welfare benefit payments
and to introduce income distribution as a determinant of welfare policy.
Utilizing spatial econometric methods we find statistical significant
strategic interaction between local governments for both the welfare benefit
norm decided by the local council and the expected welfare benefits of
a standardized person. No robust relationship is
found between inequality and welfare benefits and thus we offer no strong
support for the Romer-Meltzer-Richard hypothesis. We conclude that there
is a geographic pattern in welfare benefits. This does not necessarily
imply underprovision, since the grant financing of the local governments
may generate overall excessive public spending.
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