Grant Effects on Public Finance for Local Governments with Self-Selection Behavior

Hitotsubashi Journal of Economics, 62 (2021), pp.33-58.

38 Pages Posted: 22 Mar 2021 Last revised: 12 Jul 2021

See all articles by Cheng-Tao Tang

Cheng-Tao Tang

International University of Japan

Date Written: March 1, 2021

Abstract

This paper estimates causal effects of intergovernmental grant effects on expenditures and tax revenues of all municipalities and cities in the Philippines over the period 1993–2016. This is done by firstly utilizing a rule-based grant distribution scheme. Second, we apply an instrumental variable approach to correct a noticeable self-selection bias in the Philippine local governance, where a municipality can opt to convert to a city to receive more grants once it meets conversion criteria. Our finding shows that one-peso increase in grant per capita induces 0.84-peso increase in local expenditure and has zero effect on local tax revenue. The results provide evidence of a flypaper effect among both municipalities and cities in the Philippines. We also show that there are heterogeneous flypaper effects, as the cities or high-income local government units exhibit greater flypaper effects on public expenditure.

Keywords: Intergovernmental grants; Instrumental variable; Self-selection; Public finance; Flypaper effect

JEL Classification: C26, H71, H72, H77, R51

Suggested Citation

Tang, Cheng-Tao, Grant Effects on Public Finance for Local Governments with Self-Selection Behavior (March 1, 2021). Hitotsubashi Journal of Economics, 62 (2021), pp.33-58., Available at SSRN: https://ssrn.com/abstract=3809483

Cheng-Tao Tang (Contact Author)

International University of Japan ( email )

777 Kokusai-Cho
Minami Uonuma Shi, Niigata-ken 949-7277
Japan
+81 25-779-1508 (Phone)

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