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Local Government Finances: The Link between Intergovernmental Transfers and Net Worth

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  • Luiz de Mello

    (OECD)

Abstract

There is a large literature on how the sharing of revenue between different levels of government and the design of intergovernmental transfer schemes affect sub-national finances. Using a panel of OECD countries during 1980-2005, this paper tests for: i) the presence of a stable long-run statistical association between changes in transfer receipts and sub-national net worth and ii) the direction of causality between changes in transfer receipts and net worth. The main empirical findings are that, first, there is a stable long-term relationship between transfer receipts and local government net worth for the case of current, but not capital, transfers. An increase in intergovernmental transfer receipts is found to be associated with a modest reduction in the recipient jurisdiction’s net worth over the long term, but a fall in net worth is associated with an almost one-to-one subsequent increase in transfer receipts. Second, the direction of causality is sensitive to the technique used to estimate the long-term parameters. One technique suggests that causality runs from transfers to net worth, which lends support to a large literature on the effect of cost-shifting on sub-national budget outcomes. But causality also appears to run from net worth to transfer receipts, suggesting that transfers may be used as a deficitfinancing tool. Finances des administrations territoriales : La relation entre les transferts inter-administrations et les actifs nets des administrations territoriales Il existe une importante littérature sur la façon dont les finances des administrations territoriales sont affectées par la répartition des revenus entre les différents niveaux d’administration et par la conception des transferts inter-administrations. En utilisant un panel de pays de l’OCDE sur la période 1980-2005, ce document teste :i) l’existence d’une relation statistique stable de long terme entre les variations des transferts reçus et celles de la valeur nette des administrations territoriales, et ii) la direction de la relation de causalité entre les variations des transferts reçus et celles de la valeur nette. Les principaux résultats empiriques suggèrent, en premier lieu, l’existence d’une relation stable de long terme entre les transferts reçus et la valeur nette des administrations locales s’agissant des transferts courants, mais non de ceux en capital. Une augmentation des transferts inter-administration reçus est associée à une faible réduction de la valeur nette des administrations bénéficiaires sur le long terme, mais une baisse de la valeur nette est elle-même associée à une augmentation quasiment équivalente des transferts reçus. Deuxièmement, la direction de la relation de causalité est sensible à la technique utilisée pour estimer les paramètres de long terme. Selon une technique, la direction va des transferts reçus vers la valeur nette, ce qui corrobore une importante littérature sur les effets du transfert des coûts sur les résultats budgétaires des collectivités locales. Cependant selon une autre technique, la direction de la causalité va de la valeur nette vers les transferts reçus suggérant que les transferts peuvent être utilisés pour financer les déficits budgétaires.

Suggested Citation

  • Luiz de Mello, 2007. "Local Government Finances: The Link between Intergovernmental Transfers and Net Worth," OECD Economics Department Working Papers 581, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:581-en
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    File URL: http://dx.doi.org/10.1787/080476332876
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    References listed on IDEAS

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    Cited by:

    1. Paolo Chiades & Luciano Greco & Vanni Mengotto & Luigi Moretti & Paola Valbonesi, 2016. "Intergovernmental transfers and expenditure arrears," Working Papers hal-01442684, HAL.
    2. Luc Eyraud & Anita Tuladhar & Julio Escolano & Marialuz Moreno Badia & Juliane Sarnes, 2012. "Fiscal Performance, Institutional Design and Decentralization in European Union Countries," IMF Working Papers 12/45, International Monetary Fund.
    3. Luc Eyraud & Lusine Lusinyan, 2011. "Decentralizing Spending More Than Revenue; Does it Hurt Fiscal Performance?," IMF Working Papers 11/226, International Monetary Fund.
    4. Eichler, Stefan & Hofmann, Michael, 2013. "Sovereign default risk and decentralization: Evidence for emerging markets," European Journal of Political Economy, Elsevier, vol. 32(C), pages 113-134.
    5. Paolo Chiades & Luciano Greco & Vanni Menegotto & Luigi Moretti & Paola Valbonesi, 2015. "Fiscal Consolidation and Expenditure Arrears: Evidence from Local Governments’ Investments," "Marco Fanno" Working Papers 0197, Dipartimento di Scienze Economiche "Marco Fanno".

    More about this item

    Keywords

    actifs nets; administration locale; co-intégration en panel; federalism; fédéralisme; local government; net worth; panel co-integration; transfers; transferts; valeur nette;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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