Discussion paper
DP20349 Redistribution, Local Spending, and Growth: Evidence from the Origins of a Municipal Equalization Fund
This paper examines how intergovernmental transfers affect local government behavior and economic outcomes during the early stages of welfare state formation in Denmark. We exploit a 1937 reform that reimbursed municipal spending on social, medical, and school services (``MEF grants''). Using newly digitized annual panel data and a shift-share like IV strategy, we show that these grants expanded municipal budgets (crowding-in), reduced income inequality, and did not reduce average income or firm profitability. These findings contribute to long-standing debates on the equity-efficiency tradeoff and show that redistributive transfers can expand local welfare capacity without incurring significant growth costs.
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