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Local Governments' Asymmetric Reactions to Grants

  • Santiago Lago-Peñas

    (University of Vigo, Ourense, Spain,

In this article, a data set corresponding to Spanish municipalities is used to test asymmetries in the effects of increases and decreases in grants on total spending, with political and financial factors included as possible explanations of them. Estimation results strongly support the hypothesis of asymmetry. Recipients compensate part of the loss in grants by increasing other revenues. This fiscal replacement form of asymmetry is explained by two factors: incumbent's ideology and financial capacity of getting into debt. The relationship between deficits and ideology is studied. While increases in deficits because of reductions in grants are statistically significant only in the case of leftist incumbents, there are other causal mechanisms relating ideology and propensity toward deficits. These differences play in opposite directions, and the net result is that the relationship between ideology and deficit size is not statistically significant.

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Article provided by in its journal Public Finance Review.

Volume (Year): 36 (2008)
Issue (Month): 2 (March)
Pages: 219-242

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Handle: RePEc:sae:pubfin:v:36:y:2008:i:2:p:219-242
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