Isabella Lehmann, Matthias Wrede
The Bavarian Municipal Fiscal Equalization Scheme: Emphasis on Equity Rather than Efficiency
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Employing the approach of Albouy (2012), this paper evaluates the efficiency and equity of the municipal fiscal equalization scheme in the federal state of Bavaria in Germany. Calculating a measure reflecting the internalization of fiscal and real externalities by state grants, we conduct a regression analysis on variables describing efficiency and equity criteria. Because the fiscal equalization scheme redistributes revenues toward regions with low realized incomes and a larger population share of low-productivity residents, the scheme satisfies certain equity criteria. However, the fiscal equalization scheme likely does not internalize local public-good externalities and therefore hampers spatial efficiency.