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Grant Effects on Public Finance for Local Governments with Self-selection Behavior

Author

Listed:
  • Mamaradlo, Marivic Delos Santos
  • Tang, Cheng-Tao
  • Wong, Chun Yee

Abstract

This paper estimates causal effects of intergovernmental grants on local expenditure and tax revenue. This is done by utilizing a rule-based grant distribution scheme in the Philippines. The results provide evidence of a flypaper effect among both municipalities and cities in the Philippines, i.e., grants create a large stimulative effect on local spending but have no effect on the reduction of local taxation. The result is robust to a noticeable self-selection bias in the Philippine local governance, where a municipality can opt to convert to a city to receive more grants once it meets conversion criteria.

Suggested Citation

  • Mamaradlo, Marivic Delos Santos & Tang, Cheng-Tao & Wong, Chun Yee, 2021. "Grant Effects on Public Finance for Local Governments with Self-selection Behavior," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 62(1), pages 33-58, June.
    • Handle: RePEc:hit:hitjec:v:62:y:2021:i:1:p:33-58
    DOI: 10.15057/hje.2021002
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    References listed on IDEAS

    as
    1. Gordon, Nora, 2004. "Do federal grants boost school spending? Evidence from Title I," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1771-1792, August.
    2. Robin Boadway & Anwar Shah, 2007. "Intergovernmental Fiscal Transfers : Principles and Practice," World Bank Publications - Books, The World Bank Group, number 7171, December.
    3. Heléne Lundqvist, 2015. "Granting public or private consumption? Effects of grants on local public spending and income taxes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(1), pages 41-72, February.
    4. Gilberto M. Llanto, 2012. "The assignment of functions and intergovernmental fiscal relations in the Philippines 20 years after decentralization," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 49(1), pages 37-80, June.
    5. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416-416.
    6. Thushyanthan Baskaran, 2016. "Intergovernmental Transfers, Local Fiscal Policy, and the Flypaper Effect: Evidence from a German State," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 72(1), pages 1-40, March.
    7. David F. Bradford & Wallace E. Oates, 1971. "The Analysis of Revenue Sharing in a New Approach to Collective Fiscal Decisions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 85(3), pages 416-439.
    8. Brian Knight, 2002. "Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program," American Economic Review, American Economic Association, vol. 92(1), pages 71-92, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Cheng-Tao Tang & Chun Yee Wong & Orelie Bathan Delas Alas, 2022. "Effects of Intergovernmental Transfers on Income and Poverty Rates: Evidence from the Philippines," Working Papers EMS_2022_06, Research Institute, International University of Japan.

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    More about this item

    Keywords

    intergovernmental grants; instrumental variable; self-selection; public finance; flypaper effect;
    All these keywords.

    JEL classification:

    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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