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The Income Effect of Unconditional Grants: A Reduction in the Collection Effort of Municipalities

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  • Javiera Bravo
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    Abstract

    This paper presents research on the effect of unconditional grants on local government revenue in Chile: the receipt of transfers may engender an income effect that reduces the collection effort of municipalities. Grants are endogenous and we exploit a kink in a component of the Chilean formula for resource distribution for a panel of 340 Chilean municipalities from 1990 to 2007. We find empirical evidence that for Chilean municipalities, unconditional grants have a negative effect on local revenue. Specifically, an increase in per capita grant amount of one standard deviation is associated with a decrease of between 0.25 and 0.32 standard deviations in local per capita revenue.

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    File URL: http://www.economia.puc.cl/docs/dt_437.pdf
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    Bibliographic Info

    Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 437.

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    Date of creation: 2013
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    Handle: RePEc:ioe:doctra:437

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    Keywords: fiscal decentralization; intergovernmental grants; local revenue collection; regression kink design;

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    1. John Roemer & Selva Demiralp & Holly Liu & Jeffrey Williams, 2003. "The 'Flypaper Effect' is not an anomaly," Working Papers 04, University of California, Davis, Department of Economics.
    2. Jonathan Guryan, 2001. "Does Money Matter? Regression-Discontinuity Estimates from Education Finance Reform in Massachusetts," NBER Working Papers 8269, National Bureau of Economic Research, Inc.
    3. Melo, Ligia, 2002. " The Flypaper Effect under Different Institutional Contexts: The Colombian Case," Public Choice, Springer, vol. 111(3-4), pages 317-45, June.
    4. Christian Baretti & Bernd Huber & Karl Lichtblau, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," International Tax and Public Finance, Springer, vol. 9(6), pages 631-649, November.
    5. 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.
    6. 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.
    7. Dahlberg, Matz & Mörk, Eva & Rattso, Jorn & Ågren, Hanna, 2006. "Using a discontinuous grant rule to identify the effect of grants on local taxes and spending," Working Paper Series 2006:25, Uppsala University, Department of Economics.
    8. Baretti, Christian & Huber, Bernd & Lichtblau, Karl, 2002. "A Tax on Tax Revenue: The Incentive Effects of Equalizing Transfers: Evidence from Germany," Munich Reprints in Economics 20129, University of Munich, Department of Economics.
    9. David S. Lee & Thomas Lemieux, 2010. "Regression Discontinuity Designs in Economics," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 281-355, June.
    10. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    11. Chernick, Howard, 1998. "Fiscal Capacity in New York: The City Versus the Region," National Tax Journal, National Tax Association, vol. 51(n. 3), pages 531-40, September.
    12. Bradford, David F & Oates, Wallace E, 1971. "Towards a Predictive Theory of Intergovernmental Grants," American Economic Review, American Economic Association, vol. 61(2), pages 440-48, May.
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