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Fiscal equalization and composition of subnational government spending: implications for regional convergence

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  • Abebe Hailemariam
  • Ratbek Dzhumashev

Abstract

This study examines the impact of fiscal equalization payments on the composition of government spending under endogenous growth theory. Analytical conjectures stemming from the model are tested empirically. As an instrumental variable for within-province variations in provinces’ equalization entitlements, we use plausibly exogenous variations in the grant eligibility rule for the Canadian fiscal equalization system. We find that fiscal equalization payments have a significant negative effect on the share of productive expenditures and a significant positive effect on the share of unproductive government expenditures. Furthermore, the results show that fiscal equalization lowers the speed of cross-regional convergence in real gross domestic product per worker.

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  • Abebe Hailemariam & Ratbek Dzhumashev, 2019. "Fiscal equalization and composition of subnational government spending: implications for regional convergence," Regional Studies, Taylor & Francis Journals, vol. 53(4), pages 587-601, April.
    • Handle: RePEc:taf:regstd:v:53:y:2019:i:4:p:587-601
    DOI: 10.1080/00343404.2018.1481287
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    Cited by:

    1. Manuel E. Lago & Santiago Lago-Peñas & Jorge Martinez-Vazquez, 2022. "On the effects of intergovernmental grants: a survey," Working Papers. Collection A: Public economics, governance and decentralization 2204, Universidade de Vigo, GEN - Governance and Economics research Network.
    2. Hailemariam, Abebe & Ivanovski, Kris & Dzhumashev, Ratbek, 2022. "Does R&D investment in renewable energy technologies reduce greenhouse gas emissions?," Applied Energy, Elsevier, vol. 327(C).

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