Abstract
The use of intergovernmental grants in educational policies may give rise to a conflict between gains attributable to local flexibility and the central government’s intention to narrow gaps in school spending and resource use across local jurisdictions. This paper estimates the impact on school resources of a Norwegian central government grant intended to decrease the student-teacher ratio in primary school (grades 1–4). The grant was given to the 100 municipalities with the highest student-teacher ratios out of more than 400 municipalities. Using a difference-in-differences approach, our results show that Norwegian municipalities did not increase teacher density in primary schools, despite receiving extra grants for this purpose. Though we cannot rule out that there was some take-up of our grant, we can exclude full take up. Our results suggest that strong enforcement mechanisms may be necessary for earmarked grants to affect local allocation of resources as intended by central governments, although this might come at the cost of reducing local flexibility.
Highlights
Public finance theory suggests that leaving tax and spending decisions to lower level governments improves allocative efficiency, i.e. the matching of goods and services provided by lower level jurisdictions to the preferences of residents in these jurisdictions; see Oates (1999)
Theory suggests that intergovernmental grants can be used as a policy tool by upper level governments to internalize externalities across lower level governments or to reach certain distributional goals
Recent empirical studies exploiting quasi-experimental methods to identify the causal effects of grants find mixed effects of intergovernmental grants on lower level government spending (Card and Payne 2002; Gordon 2004; Cascio et al, 2013; Brunner et al, 2017; Hyman 2017)
Summary
Public finance theory suggests that leaving tax and spending decisions to lower level governments (fiscal decentralization) improves allocative efficiency, i.e. the matching of goods and services provided by lower level jurisdictions to the preferences of residents in these jurisdictions; see Oates (1999). Recent empirical studies exploiting quasi-experimental methods to identify the causal effects of grants find mixed effects of intergovernmental grants on lower level government spending (Card and Payne 2002; Gordon 2004; Cascio et al, 2013; Brunner et al, 2017; Hyman 2017). To our knowledge, Hyman (2017) is the only study available so far to investigate this issue He finds that additional school district resources originating from changes in state education finance schemes were distributed to schools that were not the intended beneficiaries in the first place.. The 2012 central government grant was designed with a clear instruction that the grant received by the municipalities should be distributed to schools with less than average student-teacher ratios and less than average student performance in the pre-policy period.
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