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Grant Impact on Local Fiscal Behavior: Full-Information Maximum Likelihood Estimates

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  • James R. Follain JR

    (Federal Home Loan Bank, San Francisco)

Abstract

A wide variety of econometric studies have been conducted to determine Abstract whether conditional grants have a different effect upon local fiscal behavior than unconditional grants and to determine if unconditional grants reduce tax effort. Unfortunately, the studies have not finally resolved these questions. In this paper, a system of expenditure and tax equations are precisely derived from the Geary-Stone utility function. The system of equations is estimated simultaneously using a Full-Information Maximum Likelihood Estimator and the validity restrictions implied by the Geary-Stone utility function. The results indicate that conditional grants do not generally have a different impact upon local expenditures than unconditional grants and that unconditional grants do not seriously dampen local tax effort. Further, the results indicate that the Geary-Stone model is plausible.

Suggested Citation

  • James R. Follain JR, 1979. "Grant Impact on Local Fiscal Behavior: Full-Information Maximum Likelihood Estimates," Public Finance Review, , vol. 7(4), pages 479-500, October.
    • Handle: RePEc:sae:pubfin:v:7:y:1979:i:4:p:479-500
    DOI: 10.1177/109114217900700404
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    References listed on IDEAS

    as
    1. David L. Smith, 1968. "The Response Of State And Local Governments To Federal Grant‐In‐Aid Payments," Journal of Finance, American Finance Association, vol. 23(3), pages 553-554, June.
    2. Wegge, Leon L F, 1969. "A Family of Functional Iterations and the Solution of Maximum Likelihood Estimating Equations," Econometrica, Econometric Society, vol. 37(1), pages 122-130, January.
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