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Fiscal and Spending Behavior of Local Governments: An Empirical Analysis Based on Norwegian Data

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Abstract

This paper treats local governments as utility maximizing agents when they allocate resources among different service sectors. We present estimates for eight service sectors, based on a modified version of the extended linear expenditure system (ELES) and using observations at the municipal level for Norway. Our econometric model recognizes user fees and budget deficits as endogenous variables. Moreover, the model accounts for heterogeneity in local tastes and production costs. Price information for local public services is not available in the data. However, by allowing for heterogeneity in the marginal budget share parameters, we achieve identification of the complete ELES. The empirical results show that local public services are in general price-inelastic. Welfare services like education, social services and care for the elderly and disabled are income-inelastic, while infrastructure is rather income-elastic. A strong flypaper effect is revealed by the response of user fees to income changes. Finally, results from out-of-sample predictions show that the ELES model is able to simulate local government behavior quite well.

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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 196.

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Date of creation: Jun 1997
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Handle: RePEc:ssb:dispap:196

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Keywords: Local public finance; local government spending; extended linear expenditure system;

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References

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  1. Kramer, Gerald H, 1973. "On a Class of Equilibrium Conditions for Majority Rule," Econometrica, Econometric Society, vol. 41(2), pages 285-97, March.
  2. Pollak, Robert A & Wales, Terence J, 1978. "Estimation of Complete Demand Systems from Household Budget Data: The Linear and Quadratic Expenditure Systems," American Economic Review, American Economic Association, vol. 68(3), pages 348-59, June.
  3. Gramlich, Edward M, 1969. "State and Local Governments and Their Budget Constraint," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(2), pages 163-82, June.
  4. J Ratts�, 1989. "Local government allocation of labour and the grant system: an applied model analysis of local government behaviour in Norway," Environment and Planning C: Government and Policy, Pion Ltd, London, vol. 7(3), pages 273-284, June.
  5. Edward M. Gramlich & Harvy Galper, 1973. "State and Local Fiscal Behavior and Federal Grant Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 15-66.
  6. Borge, Lars-Erik, 1995. " Economic and Political Determinants of Fee Income in Norwegian Local Governments," Public Choice, Springer, vol. 83(3-4), pages 353-73, June.
  7. Borge, Lars-Erik & Rattso, Jorn & Sorensen, Rune, 1995. " Local Government Service Production: The Politics of Allocative Sluggishness," Public Choice, Springer, vol. 82(1-2), pages 135-57, January.
  8. Bergstrom, Theodore C & Goodman, Robert P, 1973. "Private Demands for Public Goods," American Economic Review, American Economic Association, vol. 63(3), pages 280-96, June.
  9. Howe, Howard, 1975. "Development of the extended linear expenditure system from simple saving assumptions," European Economic Review, Elsevier, vol. 6(3), pages 305-310, July.
  10. Romer, Thomas & Rosenthal, Howard, 1979. "The elusive median voter," Journal of Public Economics, Elsevier, vol. 12(2), pages 143-170, October.
  11. Borcherding, Thomas E & Deacon, Robert T, 1972. "The Demand for the Services of Non-Federal Governments," American Economic Review, American Economic Association, vol. 62(5), pages 891-901, December.
  12. James R. Hines & Richard H. Thaler, 1995. "The Flypaper Effect," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 217-226, Fall.
  13. Borge, Lars-Erik & Rattso, Jorn, 1995. "Demographic shift, relative costs and the allocation of local public consumption in Norway," Regional Science and Urban Economics, Elsevier, vol. 25(6), pages 705-726, December.
  14. Ehrenberg, Ronald G, 1973. "The Demand for State and Local Government Employees," American Economic Review, American Economic Association, vol. 63(3), pages 366-79, June.
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Cited by:
  1. Audun Langørgen & Rolf Aaberge, 1999. "A Structural Approach for Measuring Fiscal Disparities," Discussion Papers 254, Research Department of Statistics Norway.
  2. Borge, Lars-Erik, 2000. "Charging for public services: the case of utilities in Norwegian local governments," Regional Science and Urban Economics, Elsevier, vol. 30(6), pages 703-718, December.

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