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Using a discontinuous grant rule to identify the effect of grants on local taxes and spending

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Author Info
Dahlberg, Matz () (Department of Economics)
Mörk, Eva () (Department of Economics)
Rattso, Jorn () (Department of Economics)
Ågren, Hanna (Department of Economics)

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Abstract

When investigating the effects of federal grants on the behavior of lower-level governments, it is hard to defend the handling of grants as an exogenous factor affecting local governments; federal governments often set grants based on characteristics and performance of local governments. In this paper we make use of a discontinuity in the Swedish grant system in order to estimate the causal effects of general intergovernmental grants on local spending and local tax rates. The formula for the distribution of funds is used as an exclusion restriction in an IV-estimation. We find evidence of crowding-in, where federal grants are shifted to more local spending, but not to reduced local tax rates. Our results thus confirm a flypaper effect for Sweden.

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Publisher Info
Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2006:25.

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Length: 26 pages
Date of creation: 06 Nov 2006
Date of revision:
Handle: RePEc:hhs:uunewp:2006_025

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Related research
Keywords: Fiscal federalism; grants; flypaper effect: local taxation; local government expenditure; causal effects;

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
R51 - Urban, Rural, and Regional Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Dahlberg, Matz & Johansson, Eva, 1998. "The Revenues-Expenditures Nexus: Panel Data Evidence from Swedish Municipalities," Applied Economics, Taylor and Francis Journals, vol. 30(10), pages 1379-86, October. [Downloadable!] (restricted)
  2. Joshua D. Angrist & Victor Lavy, 1999. "Using Maimonides' Rule To Estimate The Effect Of Class Size On Scholastic Achievement," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 533-575, May. [Downloadable!] (restricted)
  3. 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. [Downloadable!]
  4. 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. [Downloadable!] (restricted)
  5. Besley, Timothy & Case, Anne, 2000. "Unnatural Experiments? Estimating the Incidence of Endogenous Policies," Economic Journal, Royal Economic Society, vol. 110(467), pages F672-94, November. [Downloadable!] (restricted)
    Other versions:
  6. Joseph G. Altonji & Todd E. Elder & Christopher R. Taber, 2002. "An Evaluation of Instrumental Variable Strategies for Estimating the Effects of Catholic Schools," NBER Working Papers 9358, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Dahlberg, Matz & Lindstrom, Tomas, 1998. "Are Local Governments Governed by Forward Looking Decision Makers?: An Investigation of Spending Patterns in Swedish Municipalities," Journal of Urban Economics, Elsevier, vol. 44(2), pages 254-271, September. [Downloadable!] (restricted)
  8. Bergstrom, Pal & Dahlberg, Matz & Mork, Eva, 2004. "The effects of grants and wages on municipal labour demand," Labour Economics, Elsevier, vol. 11(3), pages 315-334, June. [Downloadable!] (restricted)
  9. Bradford, David F & Oates, Wallace E, 1971. "An Analysis of Revenue Sharing in a New Approach to Collective Fiscal Decisions," The Quarterly Journal of Economics, MIT Press, vol. 85(3), pages 416-39, August. [Downloadable!] (restricted)
  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.
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  11. Becker, Elizabeth, 1996. " The Illusion of Fiscal Illusion: Unsticking the Flypaper Effect," Public Choice, Springer, vol. 86(1-2), pages 85-102, January.
  12. Hines, James R, Jr & Thaler, Richard H, 1995. "The Flypaper Effect," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 217-26, Fall. [Downloadable!] (restricted)
  13. Johansson, Eva, 2003. "Intergovernmental grants as a tactical instrument: empirical evidence from Swedish municipalities," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 883-915, May. [Downloadable!] (restricted)
  14. Hahn, Jinyong & Todd, Petra & Van der Klaauw, Wilbert, 2001. "Identification and Estimation of Treatment Effects with a Regression-Discontinuity Design," Econometrica, Econometric Society, vol. 69(1), pages 201-09, January.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Matz Dahlberg & Heléne Lundqvist & Eva Mörk, 2008. "Intergovernmental Grants and Bureaucratic Power," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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