Welfare competition in Norway: Norms and expenditures

This paper evaluates the empirical importance of welfare competition. Our contribution is to separate the welfare benefit norm decided at the political level from the actual welfare benefit payments of a standardized person. Utilizing spatial econometric methods, we find statistical significant and similar strategic interaction between local governments for both politicians (norm) and bureaucrats (actual benefits). We do not find support for an income effect representing altruism, which is the standard explanation for welfare benefits in the theoretical literature. The strategic interaction and geographic pattern identified do not necessarily imply underprovision, since the grant financing of the local governments may generate overall excessive public spending.