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

Author

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  • Matz Dahlberg

    (Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden and CESifo)

  • Eva Mörk

    (Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden)

  • Jørn Rattsø

    (Department of Economics, Norwegian University of Science & Technology, N-7491 Trondheim, Norway)

  • Hanna Ågren

    (Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden)

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.

Suggested Citation

  • Matz Dahlberg & Eva Mörk & Jørn Rattsø & Hanna Ågren, 2006. "Using a discontinuous grant rule to identify the effect of grants on local taxes and spending," Working Papers 2006-12, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    • Handle: RePEc:ifr:wpaper:2006-12
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal federalism; grants; flypaper effect; local taxation; local government expenditure; causal effects;
    All these keywords.

    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, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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