Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

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 ()
Additional contact information
Matz Dahlberg: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Karin Edmark: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

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

JEL-codes: C33; D60; H73

34 pages, November 24, 2004

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