When the money stops: fiscal and political reactions to changing grant eligibility

Touria Jaaidane () and Sophie Larribeau ()
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Touria Jaaidane: LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - ULCO - Université du Littoral Côte d'Opale - Université de Lille - CNRS - Centre National de la Recherche Scientifique, Université de Lille
Sophie Larribeau: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique

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Abstract: We study the incentive effects of vertical equalization transfers in France. Using a reform in 2017 that tightened eligibility criteria for an equalization grant, we analyze how grant losses affect municipal budget choices. Drawing on a large panel of urban municipalities covering the 2014–2024 period, we employ a staggered difference-in-differences framework to identify the causal impact of grant losses. We first show that, on average, municipalities substitute grants with local tax revenues. Second, political factors reveal heterogeneity in responses. Left-wing municipalities increase spending and simultaneously raise taxes and debt. In contrast, right-wing municipalities increase taxes but consolidate debt. Municipalities led by narrowly elected mayors pursue stronger fiscal discipline, reducing expenditures and debt. Political fragmentation within municipal councils generates patterns consistent with coalition bargaining.

Keywords: D78; H70; H72; C23; Politics; Budget responses; Municipalities; Intergovernmental transfers (search for similar items in EconPapers)
Date: 2026
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Published in Public Choice, 2026, ⟨10.1007/s11127-026-01410-9⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05679233

DOI: 10.1007/s11127-026-01410-9

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