Regional risk-sharing provided by the fiscal system: Empirical evidence from Sweden

The objective of this paper is to analyse risk-sharing among municipalities in Sweden in terms of how the central government smooths personal income via the tax and transfer systems. Using panel data for the period 1983-2001, we find that the national tax and transfer systems mitigate an adverse shock to income of 1 krona so that the disposable income falls by 90 ore, on average. However, there are differences across regions, where the effect on disposable income varies between 78 and 93 ore in the krona. A sensitivity analysis of the stability of the estimates over time suggests that the adjustment of the rules of the transfer system in 1991, associated with the tax reform the same year, may have influenced the importance of national transfers as a means of absorbing risk, while the evidence of a structural break due to the tax reform itself is less conclusive.