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Fiscal transfers to local governments and the distribution of economic activity

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  • Lyytikäinen, Teemu
  • Ramboer, Sander
  • Toikka, Max

Abstract

We study the economic effects of transfers to local governments using a reform of the Finnish municipal grant system as a source of exogenous variation. We find that higher grants lead to lower municipal taxes and fees, and higher public spending. These changes in local fiscal policy lead to an increase in private sector jobs. Our estimates imply a cost per job of €33,000. The increase in jobs is paired with a reduction in commuting to other municipalities. The effect on migration seems small, suggesting grants bring local benefits without drastically affecting where households choose to live.

Suggested Citation

  • Lyytikäinen, Teemu & Ramboer, Sander & Toikka, Max, 2024. "Fiscal transfers to local governments and the distribution of economic activity," Working Papers 171, VATT Institute for Economic Research.
    • Handle: RePEc:fer:wpaper:171
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    File URL: https://www.doria.fi/handle/10024/190625
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    More about this item

    Keywords

    Local government grants; Internal migration; Labor markets; Commuting; Fiscal equalization; Regional policy; Local public finance and provision of public services; R23; R28; H72; fi=Kunnat ja hyvinvointialueet|sv=Kommuner och välfärdsområden|en=Municipalities and wellbeing services counties|;
    All these keywords.

    JEL classification:

    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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