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Local Government Finances: The link between Intergovernmental Transfers and Net Worth

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Author Info
Luiz de Mello ()
Abstract

There is a large literature on how the sharing of revenue between different levels of government and the design of intergovernmental transfer schemes affect sub-national finances. Using a panel of OECD countries during 1980-2005, this paper tests for: i) the presence of a stable long-run statistical association between changes in transfer receipts and sub-national net worth and ii) the direction of causality between changes in transfer receipts and net worth. The main empirical findings are that, first, there is a stable long-term relationship between transfer receipts and local government net worth for the case of current, but not capital, transfers. An increase in intergovernmental transfer receipts is found to be associated with a modest reduction in the recipient jurisdiction’s net worth over the long term, but a fall in net worth is associated with an almost one-to-one subsequent increase in transfer receipts. Second, the direction of causality is sensitive to the technique used to estimate the long-term parameters. One technique suggests that causality runs from transfers to net worth, which lends support to a large literature on the effect of cost-shifting on sub-national budget outcomes. But causality also appears to run from net worth to transfer receipts, suggesting that transfers may be used as a deficitfinancing tool.

Finances des administrations territoriales : La relation entre les transferts inter-administrations et les actifs nets des administrations territoriales
Il existe une importante littérature sur la façon dont les finances des administrations territoriales sont affectées par la répartition des revenus entre les différents niveaux d’administration et par la conception des transferts inter-administrations. En utilisant un panel de pays de l’OCDE sur la période 1980-2005, ce document teste :i) l’existence d’une relation statistique stable de long terme entre les variations des transferts reçus et celles de la valeur nette des administrations territoriales, et ii) la direction de la relation de causalité entre les variations des transferts reçus et celles de la valeur nette. Les principaux résultats empiriques suggèrent, en premier lieu, l’existence d’une relation stable de long terme entre les transferts reçus et la valeur nette des administrations locales s’agissant des transferts courants, mais non de ceux en capital. Une augmentation des transferts inter-administration reçus est associée à une faible réduction de la valeur nette des administrations bénéficiaires sur le long terme, mais une baisse de la valeur nette est elle-même associée à une augmentation quasiment équivalente des transferts reçus. Deuxièmement, la direction de la relation de causalité est sensible à la technique utilisée pour estimer les paramètres de long terme. Selon une technique, la direction va des transferts reçus vers la valeur nette, ce qui corrobore une importante littérature sur les effets du transfert des coûts sur les résultats budgétaires des collectivités locales. Cependant selon une autre technique, la direction de la causalité va de la valeur nette vers les transferts reçus suggérant que les transferts peuvent être utilisés pour financer les déficits budgétaires.

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Paper provided by OECD Economics Department in its series OECD Economics Department Working Papers with number 581.

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Date of creation: 24 Sep 2007
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Handle: RePEc:oec:ecoaaa:581-en

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Related research
Keywords: transfers transferts local government federalism fédéralisme net worth panel co-integration valeur nette actifs nets administration locale cointégration en panel

Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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