Repository logo
 

The stimulative effects of intergovernmental grants and the marginal cost of public funds

Faculty Advisor

Date

2016

Keywords

intergovernmental grants, marginal cost of public funds, flypaper effect, fiscal federalism

Abstract (summary)

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.

Publication Information

Dahlby, B. and Ferede, E. (2016). “The Stimulative Effects of Intergovernmental Grants and the Marginal Cost of Public Funds.” International Tax and Public Finance, 23(1):114-139.

Notes

Item Type

Article

Language

English

Rights

All Rights Reserved