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Sluggishness, Endogeneity and the Demand for Local Public Services

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  • Dahlberg, M.
  • Jacob, J.

Abstract

Earlier studies estimating the demand for local public services by means of the median voter model have typically assumed exogenous regressors and static set-ups. Furthermore, the commonly used log-linear specification of the demand function has in most cases not been supported by a well-defined maximisation problem. In this paper, we investigate whether it is important to control for endogeneity and dynamics in empirical work. Using a panel of 266 Swedish municipalities over the period 1981-1987, our test results show that the regressors are endogenous and that the adjustment process is potentially sluggish. We get significantly lower price- and income elasticities when we control for endogeneity and dynamics. In addition, when we control for endogeneity and dynamics, we can no longer reject the hypothesis that observed behaviour can be rationalised by a Cobb-Douglas utility function. This implies that the log-linear specification of the demand function is valid as long as appropriate econometric techniques are used.

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Bibliographic Info

Paper provided by Uppsala - Working Paper Series in its series Papers with number 2000:17.

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Length: 20 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:fth:uppaal:2000:17

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Postal: UPPSALA UNIVERSITY, DEPARTMENT OF ECONOMICS, S-751 20 UPPSALA SWEDEN.
Phone: + 46 18 471 25 00
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Web page: http://www.nek.uu.se/
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Keywords: PUBLIC GOODS ; DEMAND ; MODELS;

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References

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  1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  2. Douglas Holtz-Eakin & Harvey S. Rosen, 1991. "Municipal Labor Demand in the Presence of Uncertainty: An Econometric Approach," NBER Working Papers 3516, National Bureau of Economic Research, Inc.
  3. Matz Dahlberg & Eva Johansson, 1998. "The revenues-expenditures nexus: panel data evidence from Swedish municipalities," Applied Economics, Taylor & Francis Journals, vol. 30(10), pages 1379-1386.
  4. Rubinfeld, Daniel L., 1987. "The economics of the local public sector," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 11, pages 571-645 Elsevier.
  5. 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.
  6. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  7. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November.
  8. Becker, Elizabeth, 1996. " The Illusion of Fiscal Illusion: Unsticking the Flypaper Effect," Public Choice, Springer, vol. 86(1-2), pages 85-102, January.
  9. Muhammed N. Islam & Saud A. Choudhury, 1990. "Testing the Exogeneity of Grants to Local Governments," Canadian Journal of Economics, Canadian Economics Association, vol. 23(3), pages 676-92, August.
  10. Dahlberg, Matz & Johansson, Eva, 1997. "An Examination of the Dynamic Behavior of Local Governments Using GMM Bootstrapping Methods," Working Paper Series 1997:11, Uppsala University, Department of Economics.
  11. 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.
  12. Bailey, Stephen J & Connolly, Stephen, 1998. " The Flypaper Effect: Identifying Areas for Further Research," Public Choice, Springer, vol. 95(3-4), pages 335-61, June.
  13. Pommerehne, Werner W., 1978. "Institutional approaches to public expenditure : Empirical evidence from Swiss municipalities," Journal of Public Economics, Elsevier, vol. 9(2), pages 255-280, April.
  14. Borge, Lars-Erik & Rattso, Jorn & Sorensen, Rune, 1995. " Local Government Service Production: The Politics of Allocative Sluggishness," Public Choice, Springer, vol. 82(1-2), pages 135-57, January.
  15. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  16. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1989. "The Revenues-Expenditures Nexus: Evidence from Local Government Data," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 415-29, May.
  17. Robert Inman, 1978. "Testing political economy’s ‘as if’ proposition: is the median income voter really decisive?," Public Choice, Springer, vol. 33(4), pages 45-65, December.
  18. Borge, Lars-Erik & Rattso, Jorn, 1995. "Demographic shift, relative costs and the allocation of local public consumption in Norway," Regional Science and Urban Economics, Elsevier, vol. 25(6), pages 705-726, December.
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Citations

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Cited by:
  1. Vlachos, Jonas, 2005. "Does Labour Market Risk Increase the Size of the Public Sector? Evidence from Swedish Municipalities," CEPR Discussion Papers 5091, C.E.P.R. Discussion Papers.
  2. Ismael Sanz & Francisco Javier Velázquez, 2002. "Determinants of the Composition of Government Expenditure by Functions," European Economy Group Working Papers 13, European Economy Group.
  3. Ahlin, Åsa & Johansson, Eva, 2001. "Individual demand for local public schooling: Evidence from Swedish survey data," Working Paper Series 2001:1, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  4. Svaleryd, Helena, 2002. "Femal Representation - Is it Important for Policy Decisions?," Research Papers in Economics 2002:7, Stockholm University, Department of Economics.
  5. Mörk, Eva, 2003. "The impact of active labor market programs on municipal services," Working Paper Series 2003:2, IFAU - Institute for Evaluation of Labour Market and Education Policy.

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