OECD Economics Department Working Papers

ISSN :
1815-1973 (online)
DOI :
10.1787/18151973
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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

 

Local Government Finances

The Link between Intergovernmental Transfers and Net Worth You or your institution have access to this content

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Author(s):
Luiz de Mello
Publication Date
24 Sep 2007
Bibliographic information
No.:
581
Pages
30
DOI
10.1787/080476332876

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There is a large literature on how the sharing of revenue between different levels of government and the design of intergovernmental transfer schemes affect sub-national finances. Using a panel of OECD countries during 1980-2005, this paper tests for: i) the presence of a stable long-run statistical association between changes in transfer receipts and sub-national net worth and ii) the direction of causality between changes in transfer receipts and net worth. The main empirical findings are that, first, there is a stable long-term relationship between transfer receipts and local government net worth for the case of current, but not capital, transfers. An increase in intergovernmental transfer receipts is found to be associated with a modest reduction in the recipient jurisdiction’s net worth over the long term, but a fall in net worth is associated with an almost one-to-one subsequent increase in transfer receipts. Second, the direction of causality is sensitive to the technique used to estimate the long-term parameters. One technique suggests that causality runs from transfers to net worth, which lends support to a large literature on the effect of cost-shifting on sub-national budget outcomes. But causality also appears to run from net worth to transfer receipts, suggesting that transfers may be used as a deficitfinancing tool.
Keywords:
panel co-integration, transfers, federalism, local government, net worth
JEL Classification:
  • C33: Mathematical and Quantitative Methods / Multiple or Simultaneous Equation Models; Multiple Variables / Models with Panel Data; Longitudinal Data; Spatial Time Series
  • H11: Public Economics / Structure and Scope of Government / Structure, Scope, and Performance of Government
  • H77: Public Economics / State and Local Government; Intergovernmental Relations / Intergovernmental Relations; Federalism; Secession