Demographic shift, relative costs and the allocation of local public consumption in Norway

Local government responses to shifting demand and supply conditions are investigated. The desired allocation of local public consumption is determined in a voter group decision model where different age groups compete for services within an exogenous budget constraint. The model is implemented in an AIDS demand system built into a partial adjustment framework. The estimates indicate that the dramatic shift in the age composition of the population from the young to the elderly during the period studied has led to higher educational spending per pupil and less health care services per elderly. Age groups in decline are able to resist reallocations and gain in terms of spending per head.