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Is there a "Race-to-the-Bottom" in the Setting of Welfare Benefit Levels? Evidence from a Policy Intervention

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  • Dahlberg, Matz

    (Department of Economics)

  • Edmark, Karin

    (Department of Economics)

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-the-bottom" 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 59 SEK. This result is robust to several alternative model specifications.

Suggested Citation

  • Dahlberg, Matz & Edmark, Karin, 2004. "Is there a "Race-to-the-Bottom" in the Setting of Welfare Benefit Levels? Evidence from a Policy Intervention," Working Paper Series 2004:19, Uppsala University, Department of Economics.
    • Handle: RePEc:hhs:uunewp:2004_019
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    More about this item

    Keywords

    Welfare benefit level; Strategic interactions; Race-to-the-bottom; Policy intervention;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D60 - Microeconomics - - Welfare Economics - - - General
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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