Partisanship and the effectiveness of Fiscal Equalization: Evidence from French Municipalities

Touria Jaaidane and Sophie Larribeau ()

Economics Working Paper Archive (University of Rennes & University of Caen) from Center for Research in Economics and Management (CREM), University of Rennes, University of Caen and CNRS

Abstract: We are interested in the effectiveness of the fiscal equalization system at the French municipal level. This system hinges on both vertical equalizing transfers from the State to the municipalities and horizontal equalization defined at the consolidated level (municipalities and the inter-municipal body they belong to). The transfer received by municipalities from the State, consisting of a lump-sum and an equalizing component, is formula-based. A whole set of criteria is used to define its amount. An equalization fund is also used to redistribute resources horizontally, from the richest inter-municipal block entities to the poorest. Our main empirical results, using a large panel dataset of French municipalities with more than 1,000 inhabitants over the very recent period 2018-2022, are three-fold. We first find evidence for the role of the different criteria used to allocate the vertical transfer. Second, the equalization of tax capacities is operated mainly through the vertical transfer, as compared to the horizontal scheme whose performance is modest. We also find a number of dysfunctions in the equalization schemes, undermining their effectiveness. Third, we show that local politics comes into play and introduces partisanship in the allocation of the vertical transfer, which is at odds with the criteria-based rule.

Keywords: Fiscal equalization; Inter-governmental transfers; Local governments; Inter-municipal cooperation; Partisanship; RDD (search for similar items in EconPapers)
JEL-codes: C23 D78 H70 H72 (search for similar items in EconPapers)
Date: 2023-01
New Economics Papers: this item is included in nep-ure
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