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Local Governments' Asymmetric Reactions To Grants: Looking For The Reasons (*)

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  • Santiago Lago-Peñas (a)

    (University of Vigo Department of Applied Economics)

Abstract

. The aim of this paper is twofold. Firstly, a data set corresponding to Galician municipalities is used to test asymmetries in the effects of cuts and increases in grants on total spending. Then political factors (electoral cycle, colour and political strength of local governments) and financial factors (relative levels of taxes and debt) are examined as possible explanations of them. Results strongly support the hypothesis of asymmetry. Recipients compensate part of the loss in grants by increasing other sources of revenues. Moreover, asymmetric responses to cuts in capital grants (earmarked) and current grants (unconditional) are not significantly different. This fiscal replacement form of asymmetry is explained by two factors: incumbent’s ideology and financial capacity of getting into debt. Leftist incumbents and municipalities with a lower stock of debt are more prone to asymmetric choices. Once both factors are controlled, asymmetry disappears.

Suggested Citation

  • Santiago Lago-Peñas (a), "undated". "Local Governments' Asymmetric Reactions To Grants: Looking For The Reasons (*)," Working Papers 22-04 Classification-JEL , Instituto de Estudios Fiscales.
    • Handle: RePEc:hpe:wpaper:y:2004:i:22
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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. Manuel E. Lago & Santiago Lago-Peñas & Jorge Martinez-Vazquez, 2024. "On the effects of intergovernmental grants: a survey," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(3), pages 856-908, June.
    4. Voltes-Dorta, Augusto & Jiménez, Juan Luis & Suárez-Alemán, Ancor, 2014. "An initial investigation into the impact of tourism on local budgets: A comparative analysis of Spanish municipalities," Tourism Management, Elsevier, vol. 45(C), pages 124-133.
    5. Stijn Goeminne & Carine Smolders & Elke Vandorpe, 2017. "The real impact of a one-off fiscal restriction: empirical evidence of a flypaper effect in Flemish municipalities," Public Money & Management, Taylor & Francis Journals, vol. 37(4), pages 285-292, June.
    6. 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.
    7. Phuong Nguyen-Hoang & Yilin Hou, 2014. "Local Fiscal Responses to Procyclical Changes in State Aid," Publius: The Journal of Federalism, CSF Associates Inc., vol. 44(4), pages 587-608.

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