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How Federalism Protects Future Generations from Today's Public Debts

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  • Eichenberger Reiner

    (University of Fribourg and CREMA — Center for Research in Economics, Management and the Arts)

  • Stadelmann David

    (University of Fribourg and CREMA — Center for Research in Economics, Management and the Arts)

Abstract

From the politico-economic perspective, federalism is a protector of the present generation. But what about future generations? In federal states, Ricardian equivalence cannot be assumed to work properly, as migration between local jurisdictions undermines intergenerational redistribution based on parental altruism. However, we argue that there exists another equivalence mechanism which also works with purely selfish individuals: Public debts capitalize into property values. Jurisdictions with larger net debts exhibit, ceteris paribus, lower property prices. Debt capitalization in property values is the more pronounced the less elastic land supply is and the more mobile the other factors of production are. Therefore, capitalization is more relevant for local than for national debts, i.e. it is more pronounced in a federal than in a centralized state. Thus, federalism also becomes a protector of future generations.

Suggested Citation

  • Eichenberger Reiner & Stadelmann David, 2010. "How Federalism Protects Future Generations from Today's Public Debts," Review of Law & Economics, De Gruyter, vol. 6(3), pages 395-420, December.
    • Handle: RePEc:bpj:rlecon:v:6:y:2010:i:3:n:5
    DOI: 10.2202/1555-5879.1539
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    References listed on IDEAS

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    1. David Stadelmann & Reiner Eichenberger, 2014. "Public debts capitalize into property prices: empirical evidence for a new perspective on debt incidence," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(3), pages 498-529, June.
    2. Marco Bassetto & Leslie McGranahan, 2021. "Mobility, Population Growth, and Public Capital Spending in the United States," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 255-277, July.
    3. Martin Micheli, 2020. "Local governments’ indebtedness and its impact on real estate prices," Urban Studies, Urban Studies Journal Limited, vol. 57(5), pages 1032-1048, April.
    4. Robert C. MacKay, 2014. "Implicit Debt Capitalization in Local Housing Prices: An Example of Unfunded Pension Liabilities," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(1), pages 77-112, March.
    5. Dashle Kelley, 2014. "The political economy of unfunded public pension liabilities," Public Choice, Springer, vol. 158(1), pages 21-38, January.
    6. Masud Alam, 2021. "Heterogeneous Responses to the U.S. Narrative Tax Changes: Evidence from the U.S. States," Papers 2107.13678, arXiv.org.
    7. Peter Schwarz, 2017. "Federalism and horizontal equity across Switzerland and Germany: a new rationale for a decentralized fiscal structure," Constitutional Political Economy, Springer, vol. 28(2), pages 97-116, June.
    8. Micheli, Martin, 2016. "Local governments' indebtedness and its impact on real estate prices," Ruhr Economic Papers 605, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.

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