Effect of Intergovernmental Transfers on Income and Poverty Rates: Evidence from the Philippines

Abstract

This study investigates the effects of intergovernmental transfers on the development outcomes by exploiting a formula-based transfer scheme among municipalities and cities in the Philippines. The results suggest that the household disposable income per capita increases by 9.6% in the long run as a result of extra transfers of 1,000 Philippine pesos per capita in the Philippine local governments. However, the poverty rate has increased by approximately five percentage points in the long run. The income gains, associated with higher poverty rates, mainly occur in small and less-developed local governments (i.e., municipalities). Furthermore, there is a large stimulatory effect on local spending and a small effect on local tax revenue reduction due to extra grant transfers.

Keywords: Intergovernmental transfer, income, poverty, instrumental variable, the Philippines

JEL Classification: C26, H71, H72, H75, I32, O15