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How Local are Local Governments? Heterogeneous Effects of Intergovernmental Grants


  • Nilsson, Heléne L.

    () (Department of Economics)


While the literature on how intergovernmental grants affect the budget of receiving jurisdictions is numerous, the very few studies that explicitly deal with likely endogeneity problems focus on grants targeted towards specific sectors or to specific type of recipients. The results from these studies are mixed and make clear that knowledge about grants effects is to this date still insufficient. This paper contributes by estimating causal effects on local expenditures and income tax rates of general, non-targeted grants to Finnish municipalities. This is done in a difference-in-difference model utilizing policy-induced increases in grants to three groups of remotely populated municipalities. The results show no statistically significant response in expenditures to the policy overall. However, when investigating the extent of heterogeneity I find a large, significant effect for two out of the three groups of treated municipalities but a likely null or even negative effect for the third group. The tax rate response is small and seems to be more homogeneous.

Suggested Citation

  • Nilsson, Heléne L., 2009. "How Local are Local Governments? Heterogeneous Effects of Intergovernmental Grants," Working Paper Series 2009:16, Uppsala University, Department of Economics.
  • Handle: RePEc:hhs:uunewp:2009_016

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    References listed on IDEAS

    1. Hanna Ågren & Matz Dahlberg & Eva Mörk, 2007. "Do politicians’ preferences correspond to those of the voters? An investigation of political representation," Public Choice, Springer, vol. 130(1), pages 137-162, January.
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    10. Alesina, Alberto, 1988. "Credibility and Policy Convergence in a Two-Party System with Rational Voters," American Economic Review, American Economic Association, vol. 78(4), pages 796-805, September.
    11. Johansson, Eva, 2003. "Intergovernmental grants as a tactical instrument: empirical evidence from Swedish municipalities," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 883-915, May.
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    More about this item


    Intergovernmental grants; difference-in-difference; heterogeneous treatment effects; flypaper effect;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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