The stimulative effects of intergovernmental grants and the marginal cost of public funds
This paper tests the hypothesis that the stimulative effects of intergovernmental grants increase with the marginal cost of public funds of the recipient government. We present a simple theoretical framework that shows how a lump-sum transfer stimulates the marginal expenditures of a recipient gover...
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| Veröffentlicht in: | International tax and public finance 2016-02, Vol.23 (1), p.114-139 |
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| creator | Dahlby, Bev Ferede, Ergete |
| description | This paper tests the hypothesis that the stimulative effects of intergovernmental grants increase with the marginal cost of public funds of the recipient government. We present a simple theoretical framework that shows how a lump-sum transfer stimulates the marginal expenditures of a recipient government through an income effect and a price effect. We then test the prediction of this model using Canadian provincial data and exploit the discontinuity in the equalization grants allocation formula to identify the effects of grants. Our results indicate that the stimulative effects of lump-sum grants on spending increase with the provincial government’s marginal cost of public funds (MCF). One policy implication of our results is that higher intergovernmental transfers may be welfare improving if the federal government has a lower MCF than the provinces. |
| doi_str_mv | 10.1007/s10797-015-9352-5 |
| format | Article |
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| issn | 0927-5940 1573-6970 |
| language | eng |
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| subjects | Business Taxation/Tax Law Canada Economic models Economic statistics Economic theory Economics Economics and Finance Expenditures Federalism Government grant Government grants Government spending Hypotheses Local government Political economy Politics Public Finance Studies Tax rates Taxation Taxes |
| title | The stimulative effects of intergovernmental grants and the marginal cost of public funds |
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