When does money stick in education? Evidence from a kinked grant rule

Antti Saastamoinen and Mika Kortelainen

No 102, Working Papers from VATT Institute for Economic Research

Abstract: We study the effects of intergovernmental grants on school spending within the Finnish system of high school education funding. The system allocates lump-sum intergovernmental grants to local education organizers using a kinked grant rule. Utilizing the quasi-experimental variation in grants given by the rule, we identify the effects of grants on municipal high school education expenditures. Our results indicate that grants stimulate spending while local tax rates or revenues do not seem to be responsive to grants, thus suggesting the presence of a typical flypaper effect. However, we also consider the possibility that grant responses might be heterogeneous among municipalities. Based on our heterogeneity results, the grant response is positively associated with the share of high school age population, while the higher share of elderly is related to a lower propensity to spend on education out of grant funding. This result is in line with the idea of intergenerational conflict in education spending preferences often presented in education finance literature.

Keywords: intergovernmental transfers; flypaper effect; heterogeneous spending preferences; regression kink design; Local public finance and provision of public services; I22; H75; H73; Koulutus (search for similar items in EconPapers)
Date: 2018
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