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Determinants of Expenditure Variation in Finnish Municipalities

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  • Antti Moisio

Abstract

This paper focuses on two separate issues. First, the expenditure response of Finnish municipalities to price and income changes during the matching grants period is examined. Second, the existence of the so-called "flypaper effect" under the formula-based grant period is tested. Two panel data sets are used: the last eight years (1985-1992) of the matching grants period and the first seven years (1993-1999) of the formula-based period. Seven expenditure categories are analysed. The results suggest that positive price elasticity parameters existed for education expenditures under the matching grants system. For the social welfare and health care sector, price elasticity was negative. One reason for positive price effects may have been the closed-ended grants in the education sector. For the formula-based grants period, the results lend support to the "flypaper effect" because the estimated grant parameters were larger than the income parameters for most of the expenditure categories studied.

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Bibliographic Info

Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 269.

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Date of creation: 19 Mar 2002
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Handle: RePEc:fer:dpaper:269

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Related research

Keywords: Grants; price elasticity; income elasticity; flypaper effect;

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References

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  1. Olmsted, George M. & Denzau, Arthur T. & Roberts, Judith A., 1993. "We voted for this? : Institutions and educational spending," Journal of Public Economics, Elsevier, vol. 52(3), pages 363-376, October.
  2. Edward M. Gramlich & Harvy Galper, 1973. "State and Local Fiscal Behavior and Federal Grant Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 15-66.
  3. Becker, Elizabeth, 1996. " The Illusion of Fiscal Illusion: Unsticking the Flypaper Effect," Public Choice, Springer, vol. 86(1-2), pages 85-102, January.
  4. Strumpf, Koleman S., 1998. "A predictive index for the flypaper effect," Journal of Public Economics, Elsevier, vol. 69(3), pages 389-412, September.
  5. Gamkhar, Shama & Oates, Wallace E., 1996. "Asymmetries in the Response to Increases and Decreases in Intergovernmental Grants: Some Empirical Findings," National Tax Journal, National Tax Association, vol. 49(4), pages 501-12, December.
  6. Philip J. Grossman, 1990. "The Impact of Federal and State Grants on Local Government Spending: a Test of the Fiscal Illusion Hypothesis," Public Finance Review, , vol. 18(3), pages 313-327, July.
  7. Case, Anne C. & Rosen, Harvey S. & Hines, James Jr., 1993. "Budget spillovers and fiscal policy interdependence : Evidence from the states," Journal of Public Economics, Elsevier, vol. 52(3), pages 285-307, October.
  8. Aronsson, Thomas & Wikstrom, Magnus, 1996. "Local public expenditure in Sweden a model where the median voter is not necessarily decisive," European Economic Review, Elsevier, vol. 40(9), pages 1705-1716, December.
  9. Holtz-Eakin, Douglas, 1992. " Elections and Aggregation: Interpreting Econometric Analyses of Local Governments," Public Choice, Springer, vol. 74(1), pages 17-42, July.
  10. Romer, Thomas & Rosenthal, Howard, 1979. "The elusive median voter," Journal of Public Economics, Elsevier, vol. 12(2), pages 143-170, October.
  11. Bergstrom, Theodore C & Goodman, Robert P, 1973. "Private Demands for Public Goods," American Economic Review, American Economic Association, vol. 63(3), pages 280-96, June.
  12. James R. Hines & Richard H. Thaler, 1995. "The Flypaper Effect," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 217-226, Fall.
  13. Hamilton, Bruce W., 1983. "The flypaper effect and other anomalies," Journal of Public Economics, Elsevier, vol. 22(3), pages 347-361, December.
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Cited by:
  1. Kari Hämäläinen & Petri Böckerman, 2004. "Regional Labor Market Dynamics, Housing, and Migration," Journal of Regional Science, Wiley Blackwell, vol. 44(3), pages 543-568.
  2. Meriläinen & Jaakko, 2013. "Do Single-Party and Coalition Governments Differ in their Economic Outcomes? Evidence from Finnish Municipalities," Working Papers 51, Government Institute for Economic Research Finland (VATT).
  3. Pettersson-Lidbom, Per, 2012. "Does the size of the legislature affect the size of government? Evidence from two natural experiments," Journal of Public Economics, Elsevier, vol. 96(3), pages 269-278.
  4. Böckerman, Petri & Hämäläinen, Kari, 2002. "Housing, dynamics of regional labour markets and migration," ERSA conference papers ersa02p159, European Regional Science Association.
  5. 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.

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