The Ricardian Equivalence Versus Debt Capitalization in Local Public Finance

Rational and forward-looking individuals know that government debts today mean higher taxes in the future. The Ricardian equivalence at the national level implies that the burden of the debt cannot be shifted between generations as intergenerational transfers allow the future generation to pay back the debts. We argue that at the local level a similar equivalence holds even for non-altruistic individuals but works through a different channel: Landed property persists over time and fiscal differences are capitalized in property values. Our theoretical model predicts that communities with a more favorable asset/debt structure have, ceteris paribus, higher property prices. We confirm these predictions empirically using a panel dataset for communities in the Swiss metropolitan area of Zurich