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An empirical study of matching grants: the 'cap on CAP'

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  • Baker, Michael
  • Payne, A. Abigail
  • Smart, Michael

Abstract

Funding mechanisms for social expenditures are currently being reformed in many countries. While the theoretical implications of these changes are often easily identified, their empirical magnitude is not always as clear. For example, in federal systems social expenditure is often funded by matching grants, and estimates of the effect of varying matching rates on expenditures by sub-national governments vary widely. The ambiguity is due in part to inherent difficulties identifying price and income effects of federal grants given the structure of the funding mechanisms in most countries. In this paper, we examine a recent reform in Canada, in which federal grants for welfare expenditures were `capped' (converted from an open-ended to a closed-ended matching grant). Importantly, the cap applied to only three of ten provincial governments. Our empirical strategy exploits the time series-cross section variation in the funding mechanism provided by the differential application of the reform. This approach potentially surmounts some of the difficulties which have beset earlier studies. We find that the affected provinces did respond to the reform by reducing the growth rate of expenditures. They were 6 to 8 percentage points lower than predicted in the absence of the cap over the medium term.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 72 (1999)
Issue (Month): 2 (May)
Pages: 269-288

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Handle: RePEc:eee:pubeco:v:72:y:1999:i:2:p:269-288

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Web page: http://www.elsevier.com/locate/inca/505578

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  1. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
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  4. Moffitt, Robert, 1990. "Has State Redistribution Policy Grown More Conservative?," National Tax Journal, National Tax Association, vol. 43(2), pages 123-42, June.
  5. Peltzman, Sam, 1992. "Voters as Fiscal Conservatives," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 327-61, May.
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  8. Moffitt, Robert A., 1984. "The effects of grants-in-aid on state and local expenditures : The case of AFDC," Journal of Public Economics, Elsevier, vol. 23(3), pages 279-305, April.
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Cited by:
  1. Gervan Fearon, 2001. "Endogenous public sector budgeting: to centralize or not?," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 504-524, May.
  2. Robin Boadway, 2001. "Financing Confederation Revisited: The Economic State of the Federation," The State of Economics in Canada: Festschrift in Honour of David Slater, in: Patrick Grady & Andrew Sharpe (ed.), The State of Economics in Canada: Festschrift in Honour of David Slater, pages 37-56 Centre for the Study of Living Standards.
  3. Robin Boadway, 2001. "Inter-Governmental Fiscal Relations: The Facilitator of Fiscal Decentralization," Constitutional Political Economy, Springer, vol. 12(2), pages 93-121, June.
  4. Bev Dahlby, 2011. "The marginal cost of public funds and the flypaper effect," International Tax and Public Finance, Springer, vol. 18(3), pages 304-321, June.
  5. Robert P. Inman, 2008. "The Flypaper Effect," NBER Working Papers 14579, National Bureau of Economic Research, Inc.
  6. Lemieux, Thomas & Milligan, Kevin, 2008. "Incentive effects of social assistance: A regression discontinuity approach," Journal of Econometrics, Elsevier, vol. 142(2), pages 807-828, February.
  7. Bev Dahlby & Ergete Ferede, 2012. "The Stimulative Effects of Intergovernmental Grants and the Marginal Cost of Public Funds," CESifo Working Paper Series 3863, CESifo Group Munich.
  8. Marcel Thum & Thomas Fester & Andreas Kappler & Helmut Seitz, 2005. "Öffentliche Infrastruktur und kommunale Finanzen : Gutachten im Auftrag des Bundesministeriums für Verkehr, Bau- und Wohnungswesen und des Bundesamtes für Bauwesen und Raumordnung," ifo Dresden Studien, Ifo Institute for Economic Research at the University of Munich, number 37, October.
  9. Masayoshi Hayashi & Yohei Kobayashi, 2010. "The Effects of Central Grants on Decentralized Social Programs: Post]2005 School Expense Assistance in Japan," Global COE Hi-Stat Discussion Paper Series gd09-118, Institute of Economic Research, Hitotsubashi University.
  10. Evans, William N. & Owens, Emily G., 2007. "COPS and crime," Journal of Public Economics, Elsevier, vol. 91(1-2), pages 181-201, February.

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