Religious Heterogeneity and Fiscal Policy: Evidence from German Reunification

Abstract

Theoretical work based on social identity theory predicts that population diversity undermines redistributive public policies. This article tests this proposition exploiting an exogenous shock in diversity due to Germany's reuni cation. In contrast to previous work on ethno-linguistic or racial heterogeneity, we speci cally analyze religious diversity, which is an increasingly relevant social cleavage in many countries. Our main results corroborate that increasing religious diversity leads to a change in scal policies in Bavarian municipalities over the 1983-2005 period. Moreover, we nd some evidence of declining individual-level local identi cation over the post-reuni cation period, which suggests that the observed scal e ects are indeed linked to the theoretical mechanism of individuals' social identi cation. Finally, we highlight an important mediating role for the democratic process, since the observed scal e ects strengthen considerably following Bavarian municipalities' rst local elections after the reuni cation migration wave (March 1996) and a legal change allowing local referenda on public policies (October 1995).