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Matching versus General Grants: Local Government Response to Child-Care Subsidies

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  • Lars Håkonsen
  • Trond Erik Lunder

Abstract

We study the effects of a Norwegian experimental scheme in which 20 participating municipalities had their earmarked grants from the central government converted into general grants. The experiment effectively doubled the marginal cost of supplying child care. We analyze the effect on child-care supply and compare the empirical findings with predictions from a numerical two-period model. Using a matching procedure to select a suitable control group, we find that the participating municipalities on average expanded their child-care sector less than municipalities in the control group. The empirical effects are small, considering the large change in relative prices.

Suggested Citation

  • Lars Håkonsen & Trond Erik Lunder, 2015. "Matching versus General Grants: Local Government Response to Child-Care Subsidies," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 71(3), pages 299-327, September.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201509)71:3_299:mvgglg_2.0.tx_2-m
    DOI: 10.1628/001522108X14331675558762
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    References listed on IDEAS

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    1. Lars-Erik Borge & Jørn Rattsø, 1998. "Demographic Shift, Relative Costs and the Allocation of Local Public Consumption in Norway," Chapters, in: Jørn Rattsø (ed.), Fiscal Federalism and State–local Finance, chapter 5, pages 71-92, Edward Elgar Publishing.
    2. Bergstrom, Ted & Blomquist, Soren, 1996. "The political economy of subsidized day care," European Journal of Political Economy, Elsevier, vol. 12(3), pages 443-457, November.
    3. Aaberge, Rolf & Langorgen, Audun, 2003. "Fiscal and Spending Behavior of Local Governments: Identification of Price Effects When Prices Are Not Observed," Public Choice, Springer, vol. 117(1-2), pages 125-161, October.
    4. Borge, Lars-Erik & Brueckner, Jan K. & Rattsø, Jorn, 2014. "Partial fiscal decentralization and demand responsiveness of the local public sector: Theory and evidence from Norway," Journal of Urban Economics, Elsevier, vol. 80(C), pages 153-163.
    5. Bev Dahlby, 1996. "Fiscal externalities and the design of intergovernmental grants," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(3), pages 397-412, July.
    6. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    7. Bergstrom, Ted & Blomquist, Soren, 1996. "The political economy of subsidized day care," European Journal of Political Economy, Elsevier, vol. 12(3), pages 443-457, November.
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    More about this item

    Keywords

    fiscal federalism; matching grants; price elasticity; intertemporal spending;
    All these keywords.

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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