Welfare Competition in Germany: Decentralization, the Intensity of Competition and some evidence for the factor flow theory

This paper tests empirically for welfare competition between the 439 German counties. The first contribution of this paper is to provide evidence that the intensity of competition is sensitive to the degree of autonomy that local authorities have over their welfare policies. Using a major reform of Germany's welfare system in 2005 we show that the intensity of the strategic interaction has declined due to a move towards a less decentralized administration. Secondly, we discriminate empirically between different theories of welfare competition: We provide evidence that welfare competition in the time after the reform is confined to small, mobile households, suggesting that the strategic interaction is driven by factor-flows. Our results are complementary to those of Revelli (2006b) who argues that the interdependence of expenditure for social service provision in the UK is the result of an informational externality.