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Local Governments' Asymmetric Reactions to Grants

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  • Santiago Lago-Peñas

    (University of Vigo, Ourense, Spain, slagop@uvigo.es)

Abstract

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.

Suggested Citation

  • Santiago Lago-Peñas, 2008. "Local Governments' Asymmetric Reactions to Grants," Public Finance Review, , vol. 36(2), pages 219-242, March.
  • Handle: RePEc:sae:pubfin:v:36:y:2008:i:2:p:219-242
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    Cited by:

    1. Kruse, Ioana & Pradhan, Menno & Sparrow, Robert, 2009. "Health Spending and Decentralization in Indonesia," Proceedings of the German Development Economics Conference, Frankfurt a.M. 2009 33, Verein für Socialpolitik, Research Committee Development Economics.
    2. Hernández, Aday & Jiménez, Juan Luis, 2014. "Does high-speed rail generate spillovers on local budgets?," Transport Policy, Elsevier, vol. 35(C), pages 211-219.
    3. Kruse, Ioana & Pradhan, Menno & Sparrow, Robert, 2012. "Marginal benefit incidence of public health spending: Evidence from Indonesian sub-national data," Journal of Health Economics, Elsevier, vol. 31(1), pages 147-157.
    4. Phuong Nguyen-Hoang & Yilin Hou, 2014. "Local Fiscal Responses to Procyclical Changes in State Aid," Publius: The Journal of Federalism, Oxford University Press, vol. 44(4), pages 587-608.

    More about this item

    Keywords

    grants; deficit; ideology; spending;

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