Welfare Competition in Germany

On December 20, 2007 the judgment of the German Federal Constitutional Court stirs up a public debate on the extent of social decentralization in Germany. Preceding events: on January 1, 2005 an extensive welfare reform is enacted after what social bene fits are now predominantly fi nanced by the Federal Government, whereas the administration is shared by the Federal Government and the Laender. In its reasoning, the court points out that the joint administration deviates from the principle of precedence of decentralized over centralized exercise of functions1. Some fear that social decentralization connected with household mobility is a threat to distribution policy and warn against "a race to the bottom" of welfare contributions. In order to clarify the recent debate on efficient welfare policy, this work intends to empirically investigate whether such strategic interdependencies among German municipalities exist at all looking at the "old" German social system before the year 2005, where welfare policy is implemented in a predominantly decentralized framework.