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Vertical Externalities Within Multi-Level Welfare Programs: Does Central Government Welfare Spending Crowd Out Regional Spending?

Author

Listed:
  • Luis Ayala

    (Facultad de Derecho, UNED)

  • Ana Herrero-Alcalde

    (Facultad de Derecho, UNED)

  • Jorge Martinez-Vazquez

    (Economics Department, Andrew Young School of Policy Studies, Georgia State University,)

  • Carolina Navarro-Ruiz

    (Facultad de Derecho, UNED)

Abstract

This paper contributes to the existing literature on vertical externalities in fiscally decentralized settings by analyzing the impact of a quite unique experience in the vertical composition of welfare spending in a country. We study the reactions of subnational governmentsÕ spending in the transitioning from a context of complete decentralization of welfare benefits to another where a parallel central government program targeting the same population is implemented. Using data from Spanish regional and central welfare programs and the canonical model specification of multilevel government externalities, we find that regional governments reacted negatively to the introduction of the new central welfare benefits by significantly reducing their own welfare expenditures. However, this crowding-out effect is weaker in relatively richer regions and those headed by left-wing regional administrations.

Suggested Citation

  • Luis Ayala & Ana Herrero-Alcalde & Jorge Martinez-Vazquez & Carolina Navarro-Ruiz, 2024. "Vertical Externalities Within Multi-Level Welfare Programs: Does Central Government Welfare Spending Crowd Out Regional Spending?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper2402, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    • Handle: RePEc:ays:ispwps:paper2402
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