Spatial interdependence and spillovers of fiscal grants in Benin: Static and dynamic diffusions

This paper investigates the spatial diffusion of an intergovernmental grant in Benin. Using static and dynamic spatial models, we estimate the spillover effects of the Fonds d'Appui au Développement des Communes (FADeC) on per capita local government expenditure in the 77 municipalities from 2008 to 2015. Neighborliness – a measure of interdependence – is captured through geographic and distance-based spatial weighting schemes. In addition, we constructed a measurement of ethnic affinity as an alternative spatial weighting scheme to test for the existence of an ethno-spatial interdependence in local public finance in Benin. The empirical results suggest that a statistically significant share of the total effects of the FADeC stems from indirect elasticities or the diffusion process of grants received by neighboring jurisdictions, regardless of how we measure neighborliness. The results also confirm the existence of a robust ethno-spatial interdependence and complementarity in local government expenditure in Benin. The spillovers across ethnic neighbors are estimated to be 13.9% of the total effects in the short-run and 15.5% in the long-run. Put differently, the effects of the FADeC in a given municipality are influenced by the transfers received by its ethnic (and linguistic) neighbors. The findings point to the appeal of inter-governmental transfers for the decentralized financing of public services, especially in low-income countries where local bureaucratic capacity in raising own-source revenues might be limited. Supporting local governments with well-structured grants can not only be a channel to foster local public provision but also contribute to pushing geographic or ethnic neighboring localities to increase their own spending and generate positive spillovers that are crucial for wholistic regional development.