ISSN 1503-299X WORKING PAPER SERIES No. 7/2004 WELFARE COMPETITION IN NORWAY Jon Hernes Fiva Jørn Rattsø Department of Economics N-7491 Trondheim, Norway www.svt.ntnu.no/iso/wp/wp.htm Welfare competition in Norway*) Jon H. Fiva and Jørn Rattsø, Department of Economics, Norwegian University of Science and Technology, N-7491 Trondheim, Norway (E-mail:
[email protected] and
[email protected]) Abstract Local redistribution policy creates incentives for welfare migration that may result in 'underprovision' or even a 'race to the bottom'. This paper evaluates the empirical importance of welfare competition. Our contribution is to separate between the policy decision and the actual welfare benefit payments and to introduce income distribution as a determinant of welfare policy. Utilizing spatial econometric methods we find statistical significant strategic interaction between local governments for both the welfare benefit norm decided by the local council and the expected welfare benefits of a standardized person. No robust relationship is found between inequality and welfare benefits and thus we offer no strong support for the Romer-Meltzer-Richard hypothesis. We conclude that there is a geographic pattern in welfare benefits. This does not necessarily imply underprovision, since the grant financing of the local governments may generate overall excessive public spending. JEL classification C21, D78, H73 Date: June 2004 *) We are grateful to Audun Langørgen and Dag Rønningen, Statistics Norway, for making available to us their computed welfare benefit levels, funding provided by the Norwegian Research Council under the FIFOS program, and comments at the Norwegian Research Forum 2004, European Public Choice meeting 2004, and in particular from Matz Dahlberg, Roger Congleton, Bjørg Langset and Erling Holmøy.