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Testing the Exogeneity of Grants to Local Governments

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  • Muhammed N. Islam
  • Saud A. Choudhury

Abstract

This paper examines the issue of exogeneity of grants, both conditional and unconditional, with respect to local expenditures. The exogeneity (" weak," "strong," and "super") tests show that these grants are not exogenous. A model of fiscal response to endogenously determined grants is derived and tested on a pooled time-series and cross-section sample of forty-nine upper-tier municipalities in Ontario, 1977-84. The OLS and 2SLS estimates of reduced-form coefficients differ significantly, indicating a simultaneity between grants and expenditures. The estimated grant coefficients are negative significant and less than one, which implies a substitution of grant funds for own expenditures. Coefficient estimates of other socio-economic factors conform to standard results.

Suggested Citation

  • Muhammed N. Islam & Saud A. Choudhury, 1990. "Testing the Exogeneity of Grants to Local Governments," Canadian Journal of Economics, Canadian Economics Association, vol. 23(3), pages 676-692, August.
    • Handle: RePEc:cje:issued:v:23:y:1990:i:3:p:676-92
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    Cited by:

    1. Yihua Yu & Jing Wang & Xi Tian, 2016. "Identifying the Flypaper Effect in the Presence of Spatial Dependence: Evidence from Education in China's Counties," Growth and Change, Wiley Blackwell, vol. 47(1), pages 93-110, March.
    2. Marcel Thum & Thomas Fester & Andreas Kappler & Helmut Seitz, 2005. "Öffentliche Infrastruktur und kommunale Finanzen : Gutachten im Auftrag des Bundesministeriums für Verkehr, Bau- und Wohnungswesen und des Bundesamtes für Bauwesen und Raumordnung," ifo Dresden Studien, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 37, May.
    3. Gu Jiafeng & Shen Tiyan & Zhang Jiadong, 2015. "Can Financial Shortages in China’s Education Be Contagious?," Journal of Systems Science and Information, De Gruyter, vol. 3(3), pages 193-213, June.
    4. Dahlberg, M. & Jacob, J., 2000. "Sluggishness, Endogeneity and the Demand for Local Public Services," Papers 2000:17, Uppsala - Working Paper Series.
    5. Santiago Lago-Penas, 2006. "Capital grants and regional public investment in Spain: fungibility of aid or crowding-in effect?," Applied Economics, Taylor & Francis Journals, vol. 38(15), pages 1737-1747.
    6. Neva Novarro, 2004. "Do Policy-Makers Earmark to Constrain their Successors? The Case of Environmental Earmarking," Working Papers 0408, College of the Holy Cross, Department of Economics.
    7. Muhammed Islam, 1998. "Export expansion and economic growth: testing for cointegration and causality," Applied Economics, Taylor & Francis Journals, vol. 30(3), pages 415-425.
    8. Muhammed M. Islam, 1997. "On The Effects of Local Versus Central Government Financing of Local Services," The Review of Regional Studies, Southern Regional Science Association, vol. 27(1), pages 65-83, Summer.
    9. Stine, William F., 1994. "Is Local Government Revenue Response to Federal Aid Symmetrical? Evidence from Pennsylvania County Governments in a Era of Retrenchment," National Tax Journal, National Tax Association, vol. 47(4), pages 799-816, December.
    10. Maarten Allers & J. Elhorst, 2005. "Tax Mimicking and Yardstick Competition Among Local Governments in the Netherlands," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(4), pages 493-513, August.

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