Testing the Exogeneity of Grants to Local Governments

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Testing the Exogeneity of Grants to Local Governments

Author Info

Muhammed N. Islam
Saud A. Choudhury

Abstract

This paper examines the issue of exogeneity of grants, both conditional and unconditional, with respect to local expenditures. The exogeneity (" weak," "strong," and "super") tests show that these grants are not exogenous. A model of fiscal response to endogenously determined grants is derived and tested on a pooled time-series and cross-section sample of forty-nine upper-tier municipalities in Ontario, 1977-84. The OLS and 2SLS estimates of reduced-form coefficients differ significantly, indicating a simultaneity between grants and expenditures. The estimated grant coefficients are negative significant and less than one, which implies a substitution of grant funds for own expenditures. Coefficient estimates of other socio-economic factors conform to standard results.

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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 23 (1990)
Issue (Month): 3 (August)
Pages: 676-92
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Handle: RePEc:cje:issued:v:23:y:1990:i:3:p:676-92

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Maarten Allers & J. Elhorst, 2005. "Tax Mimicking and Yardstick Competition Among Local Governments in the Netherlands," International Tax and Public Finance, Springer, vol. 12(4), pages 493-513, August. [Downloadable!] (restricted)
Dahlberg, Matz & Jacob, Johanna, 2000. "Sluggishness, Endogeneity and the Demand for Local Public Services," Working Paper Series 2000:17, Uppsala University, Department of Economics. [Downloadable!]
Other versions:
- Dahlberg, M. & Jacob, J., 2000. "Sluggishness, Endogeneity and the Demand for Local Public Services," Papers 2000:17, Uppsala - Working Paper Series.
- Dahlberg, M. & Jacob, J., 2000. "Sluggishness, Endogeneity and the Demand for Local Public Services," Papers 2000-17, Uppsala - Working Paper Series.
Neva Novarro, 2004. "Do Policy-Makers Earmark to Constrain their Successors? The Case of Environmental Earmarking," Working Papers 0408, College of the Holy Cross, Department of Economics. [Downloadable!]

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