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Urban and Regional Economics Seminars

The Dynamic Response of Municipal Fiscal Budgets to Revenue Shocks

Jan Stuhler (Carlos III Madrid)


Friday 23 November 2018 13:00 - 14:30

32L 1.04, 1st Floor Conference Room, LSE, 32 Lincoln's Inn Fields, London WC2A 3PH

About this event

We study the dynamic response of local budgets to a shift in fiscal revenues. We first isolate quasi-experimental variation in transfers within Germany’s municipal fiscal equalization scheme. Because transfers depend on population counts, the 1987 Census led to sudden and permanent shifts in revenues across municipalities. Using an event-study design, we then track the causal response of municipal budgets to revenue gains or losses. In contrast to prior work, we focus on the dynamics of this response over time. Local budgets do not adjust instantly. The total level of government spending adapts over three to four years, predominantly driven by capital and infrastructure investments. Local tax rates adjust even more slowly. Business and property tax rates do decrease in response to revenue gains, but the adjustment stretches over at least one decade. We contrast these findings with prior evidence on the “flypaper effect”, as well as theoretical work on local public finance.

This event will take place in 32L 1.04, 1st Floor Conference Room, LSE, 32 Lincoln's Inn Fields, London WC2A 3PH.

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