May 31, 2013

Fiscal Equalization and Capitalization: Evidence from a Policy Reform

Fiscal equalization through the allocation of central government grants may have adverse distributional implications if these grants capitalize into house values. We investigate the impact of changes in grants induced by a reform of the Dutch grant system.
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Since this reform was implemented gradually and in two subsequent stages that targeted different policy domains, we are able to identify on the nonlinearity of its impact over time. As robustness checks, we identify on either stage separately, or on a reform of financing school buildings, which should have limited effects on house prices as additional funds came with an additional task for municipalities. Our results indicate full capitalization of grants. It follows that property owners were important beneficiaries in the municipalities that saw their grants increased because of disadvantageous socio-economic composition.


Wouter Vermeulen
Maarten Allers