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The Income Effect of Unconditional Grants: A Reduction in the Collection Effort of Municipalities

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  • Javiera Bravo

Abstract

This paper presents research on the effect of unconditional grants on local government revenue in Chile: the receipt of transfers may engender an income effect that reduces the collection effort of municipalities. Grants are endogenous and we exploit a kink in a component of the Chilean formula for resource distribution for a panel of 340 Chilean municipalities from 1990 to 2007. We find empirical evidence that for Chilean municipalities, unconditional grants have a negative effect on local revenue. Specifically, an increase in per capita grant amount of one standard deviation is associated with a decrease of between 0.25 and 0.32 standard deviations in local per capita revenue.

Suggested Citation

  • Javiera Bravo, 2013. "The Income Effect of Unconditional Grants: A Reduction in the Collection Effort of Municipalities," Documentos de Trabajo 437, Instituto de Economia. Pontificia Universidad Católica de Chile..
  • Handle: RePEc:ioe:doctra:437
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    File URL: http://www.economia.uc.cl/docs/dt_437.pdf
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    References listed on IDEAS

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    7. Melo, Ligia, 2002. "The Flypaper Effect under Different Institutional Contexts: The Colombian Case," Public Choice, Springer, vol. 111(3-4), pages 317-345, June.
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    More about this item

    Keywords

    fiscal decentralization; intergovernmental grants; local revenue collection; regression kink design;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis

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