Scandinavian Working Papers in Economics
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Department of Economics, Uppsala University Working Paper Series, Department of Economics, Uppsala University

No 2004:19:
Is there a "Race-to-the-Bottom" in the Setting of Welfare Benefit Levels? Evidence from a Policy Intervention

Matz Dahlberg () and Karin Edmark ()

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.

Keywords: Welfare benefit level; Strategic interactions; Race-to-the-bottom; Policy intervention; (follow links to similar papers)

JEL-Codes: C33; D60; H73; (follow links to similar papers)

34 pages, November 24, 2004

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This paper is published as:
Dahlberg, Matz and Karin Edmark, (2008), 'Is there a "Race-to-the-Bottom" in the Setting of Welfare Benefit Levels? Evidence from a Policy Intervention', Journal of Public Economics, Vol. 92, pages 1193-1209

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