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

A new article by Matz Dahlberg, Eva Mörk, Jørn Rattsø and Hanna Ågren in Journal of Public Economics

2008 Using a discontinuous grant rule to identify the effect of grants on local taxes and spending, Vol. 92, Issue 12, pp. 2320-2335.

Abstract
When investigating the effects of federal grants on the behaviour of lower-level governments, it is hard to defend the handling of grants as an exogenous factor. Federal governments often set grants based on characteristics and performance of decentralized 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.

Keywords: Fiscal federalism; Grants; Local taxation; Local government expenditure; Causal effects; Discontinuity analysis