The Municipal Equalization System and its Implications for Economic Growth and Efficiency

Abstract: This paper investigates the correlation between Sweden's municipal equalization system and economic growth and efficiency for the years 2005 to 2022. This paper uses panel data for all 290 municipalities and a fixed effects model to study the two main parts of Sweden's municipal equalization system: the income equalization system and the cost equalization system. This paper examines multiple variables that are associated with a municipality's economic growth and efficiency. These variables include Gross Regional Product (GRP), tax capacity, employment, tax rate, aggregated costs, as well as several variables related to disaggregated costs. Dummy variables are used to categorize municipalities based on traits such as population density, marginal effects, and whether they contribute (give) to or receive (take) benefits from the system allowing comparisons between municipalities. The aim of this paper is to contribute to the limited existing literature on this subject by offering insights into how the system correlates with municipal incentives for fostering economic growth and efficiency. This will be achieved by examining variables related to growth and spending in municipalities. Overall, the estimates presented in this paper do not provide reliable evidence of a correlation between the system and economic growth and efficiency. Yet, some findings in this study suggest a connection between the system and economic growth and efficiency. For example, variables like aggregated costs and the arena variable indicate a correlation.