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Local Governments' Asymmetric Reactions To Grants: Looking For The Reasons (*)

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  • Santiago Lago-Peñas (a)

    ()
    (University of Vigo Department of Applied Economics)

Abstract

. The aim of this paper is twofold. Firstly, a data set corresponding to Galician municipalities is used to test asymmetries in the effects of cuts and increases in grants on total spending. Then political factors (electoral cycle, colour and political strength of local governments) and financial factors (relative levels of taxes and debt) are examined as possible explanations of them. Results strongly support the hypothesis of asymmetry. Recipients compensate part of the loss in grants by increasing other sources of revenues. Moreover, asymmetric responses to cuts in capital grants (earmarked) and current grants (unconditional) are not significantly different. This fiscal replacement form of asymmetry is explained by two factors: incumbent’s ideology and financial capacity of getting into debt. Leftist incumbents and municipalities with a lower stock of debt are more prone to asymmetric choices. Once both factors are controlled, asymmetry disappears.

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Paper provided by Instituto de Estudios Fiscales in its series Working Papers with number 22-04 Classification-JEL : H71, H72, H77..

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Handle: RePEc:hpe:wpaper:y:2004:i:22

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Keywords: Local governments; Grants; Fiscal federalism; Spain.;

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Cited by:
  1. Sparrow, R.A. & Pradhan, M.P. & Kruse, I., 2009. "Marginal benefit incidence of public health spending: evidence from Indonesian sub-national data," ISS Working Papers - General Series 18706, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.
  2. Kruse, Ioana & Pradhan, Menno & Sparrow, Robert, 2009. "Health Spending and Decentralization in Indonesia," Proceedings of the German Development Economics Conference, Frankfurt a.M. 2009 33, Verein für Socialpolitik, Research Committee Development Economics.

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