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A Structural Approach for Measuring Fiscal Disparities

Fiscal disparities arise from differences in costs and capacity to produce a standard package of public services. This paper proposes to use a structural modelling approach as basis for measuring fiscal disparities across municipalities. This approach differs from the widely used reduced-form approach, in the sense that identification of minimum required costs or expenditure need is made by reference to a structural model of the fiscal and spending behavior of local governments. The empirical analysis, which is based on data for Norwegian municipalities, relies on various alternative measures of fiscal capacity. One of these measures is defined by the local tax-bases, whilst another also includes grants-in-aid from the central government. This facilitates identification of the equalizing effect from grants. By comparing the effects of the current grant system with the effects of a policy designed to reduce fiscal disparities it is demonstrated that the goal of locational neutrality is far from being fulfilled. Moreover, it is shown that differences in local priorities only give a minor contribution to the observed differences in service levels.

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Paper provided by Statistics Norway, Research Department in its series Discussion Papers with number 254.

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Date of creation: Apr 1999
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Handle: RePEc:ssb:dispap:254
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  1. Lluch, Constantino, 1973. "The extended linear expenditure system," European Economic Review, Elsevier, vol. 4(1), pages 21-32, April.
  2. Anwar Shah, 1996. "A Fiscal Need Approach to Equalization," Canadian Public Policy, University of Toronto Press, vol. 22(2), pages 99-115, June.
  3. Thomas A. Downes & Thomas F. Pogue, 1992. "Intergovernmental Aid To Reduce Fiscal Disparities: Problems of Definition and Measurement," Public Finance Review, , vol. 20(4), pages 468-482, October.
  4. Le Grand, Julian, 1975. "Fiscal Equity and Central Government Grants to Local Authorities," Economic Journal, Royal Economic Society, vol. 85(339), pages 531-47, September.
  5. Rolf Aaberge & Audun Langørgen, 1997. "Fiscal and Spending Behavior of Local Governments: An Empirical Analysis Based on Norwegian Data," Discussion Papers 196, Statistics Norway, Research Department.
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