Using a discontinuous grant rule to identify the effect of grants on local taxes and spending

Matz Dahlberg; Eva Mörk; Jørn Rattsø; Hanna Ågren

When investigating the effects of federal grants on the behavior of lower-level governments, it is hard to defend the handling of grants as an exogenous factor affecting local governments; federal governments often set grants based on characteristics and performance of local governments. In this paper we make use of a discontinuity in the Swedish grant system in order to estimate the causal effects of general intergovernmental grants on local spending and local tax rates. The formula for the distribution of funds is used as an exclusion restriction in an IV-estimation. We find evidence of crowding-in, where federal grants are shifted to more local spending, but not to reduced local tax rates. Our results thus confirm a flypaper effect for Sweden.

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Year of publication:	2006
Authors:	Dahlberg, Matz ; Mörk, Eva ; Rattsø, Jørn ; Ågren, Hanna
Publisher:	Munich : Univ., Center for Economic Studies [u.a.]
Subject:	Finanzausgleich \| Intergovernmental transfers \| Gemeindefinanzen \| Local government finance \| Kommunale Ausgaben \| Local government expenditure \| Gemeindesteuer \| Local tax \| Flypaper-Effekt \| Flypaper effect \| Schweden \| Sweden \| Finanzbeziehungen \| Fiscal relations \| Gemeindeausgaben \| Fiskalföderalismus