How Local are Local Governments? Heterogeneous Effects of Intergovernmental Grants

Heléne L. Nilsson ()
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Heléne L. Nilsson: Department of Economics, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

No 2009:16, Working Paper Series from Uppsala University, Department of Economics

Abstract: While the literature on how intergovernmental grants affect the budget of receiving jurisdictions is numerous, the very few studies that explicitly deal with likely endogeneity problems focus on grants targeted towards specific sectors or to specific type of recipients. The results from these studies are mixed and make clear that knowledge about grants effects is to this date still insufficient. This paper contributes by estimating causal effects on local expenditures and income tax rates of general, non-targeted grants to Finnish municipalities. This is done in a difference-in-difference model utilizing policy-induced increases in grants to three groups of remotely populated municipalities. The results show no statistically significant response in expenditures to the policy overall. However, when investigating the extent of heterogeneity I find a large, significant effect for two out of the three groups of treated municipalities but a likely null or even negative effect for the third group. The tax rate response is small and seems to be more homogeneous.

Keywords: Intergovernmental grants; difference-in-difference; heterogeneous treatment effects; flypaper effect (search for similar items in EconPapers)
JEL-codes: C23 H71 H72 H77 R51 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2009-12-02
New Economics Papers: this item is included in nep-pbe and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:uunewp:2009_016

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