Scandinavian Working Papers in Economics
Working Paper Series,
Uppsala University, Department of Economics
No 2006:25: Using a discontinuous grant rule to identify the effect of grants on local taxes and spending
Matz Dahlberg (), Eva Mörk (), Jorn Rattso () and Hanna Ågren
Additional contact information
Matz Dahlberg: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Eva Mörk: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Jorn Rattso: Department of Economics, Postal: Norwegian University of Science and Technology, N-7491 Trondheim. Norway
Hanna Ågren: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Abstract: 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.
Keywords: Fiscal federalism; grants; flypaper effect: local taxation; local government expenditure; causal effects
26 pages, November 6, 2006
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