The impact of fiscal equivalence: evidence from funding compulsory schooling in Switzerland

Abstract This paper quantifies the consequences of a better match between decision-making and cost-bearing responsibilities in the provision of compulsory schooling in Switzerland. Specifically, I investigate whether the elimination of cost-sharing based on effective local expenditures for teachers sets incentives for cost-savings among municipalities. This hypothesis is tested through two local-level panel analyses in the Swiss cantons of Luzern and St.Gallen. The results provide empirical evidence that a substantial increase in the local cost share of teacher expenditures does, on average, not lead to an economically relevant and statistically significant reduction in municipal spending on teachers per student. However, the larger the municipality, the higher the estimated savings, which is evidence that small municipalities face only little scope for cost reductions because they are severely constrained by cantonal policies on class formation. I discuss several residual reasons that might account for limited consequences, including imperfect labor markets for teachers and the political economy of teacher employment.