The Income Effect of Unconditional Grants: A Reduction in the Collection Effort of Municipalities

Javiera Bravo

No 437, Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile.

Abstract: This paper presents research on the effect of unconditional grants on local government revenue in Chile: the receipt of transfers may engender an income effect that reduces the collection effort of municipalities. Grants are endogenous and we exploit a kink in a component of the Chilean formula for resource distribution for a panel of 340 Chilean municipalities from 1990 to 2007. We find empirical evidence that for Chilean municipalities, unconditional grants have a negative effect on local revenue. Specifically, an increase in per capita grant amount of one standard deviation is associated with a decrease of between 0.25 and 0.32 standard deviations in local per capita revenue.

Keywords: fiscal decentralization; intergovernmental grants; local revenue collection; regression kink design (search for similar items in EconPapers)
JEL-codes: H2 H3 H7 R5 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-lam, nep-pbe and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:ioe:doctra:437

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