Heterogeneous Effects of Fiscal Equalization Grants on Local Expenditures: Evidence from Two Formula-Based Variations

56 Pages Posted: 27 Apr 2015 Last revised: 7 Oct 2015

Date Written: September 9, 2015

Abstract

This paper investigates the effects of fiscal equalization grants on total expenditure and disaggregated expenditures by exploiting two different formula-based exogenous variations in grants. Examining the institutional settings of the Japanese fiscal equalization scheme and estimating local average grant effects with a regression kink design and an instrumental variable approach, I demonstrate that there exist heterogeneous grant effects for two groups of municipalities with different fiscal conditions. That is, estimated grant effects on total expenditure are approximately one-to-one for municipalities around the threshold of grant eligibility, but much more than one-to-one for municipalities that are heavily dependent on fiscal equalization grants. In addition, grant effects on disaggregated expenditures are dispersed across different expenditure items in the former type of municipality but concentrated on construction expenditures in the latter type. I then discuss that the observed grant effect heterogeneity is a consequence of the institutional settings of the Japanese fiscal equalization scheme.

Keywords: Intergovernmental grants, Flypaper effect, Treatment effect heterogeneity, Regression Kink Design

JEL Classification: C13, C21, H71, H72, H77

Suggested Citation

Ando, Michihito, Heterogeneous Effects of Fiscal Equalization Grants on Local Expenditures: Evidence from Two Formula-Based Variations (September 9, 2015). Available at SSRN: https://ssrn.com/abstract=2599299 or http://dx.doi.org/10.2139/ssrn.2599299

Michihito Ando (Contact Author)

Rikkyo University ( email )

3-34-1 Nishi-Ikebukuro
Toshima-ku, Tokyo 171-8501
Japan

HOME PAGE: http://https://sites.google.com/site/michihito7ando/

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