Are Local Governments Governed by Forward Looking Decision Makers?

In this paper we investigate the extent to which local government consumption in Sweden is determined by permanent rather than current resources. Evidence from a panel of municipalities indicates that most consumption (90-95 percent) is associated with permanent resources. That is, spending decisions on non-durable goods and services in Swedish municipalities are to a very high degree determined by rational, forward looking decision makers. This result contrasts sharply with the common view that local governments do not act intertemporally. One policy implication is that it might be difficult for the central government to conduct stabilization policy by influencing the municipalities' current resources.