Intergovernmental Grants and Local Public Expenditure: Spending Decisions and Information Spillover Effects

This empirical study takes advantage of a new intergovernmental grant in order to investigate the expenditure behavior of the municipalities in Sweden in two ways. First, the grant is used to study the effect on municipal spending related to the grant. Second, the grant is used to test a hypothesis of spatial interaction among municipalities due to mimicking behavior. The grant and expenditures studied here pertain to one specific service area of the Swedish municipalities; services to functionally impaired individuals. The grant was introduced in 2004. The data used pertains to the period before (2001-2003) and after (2004-2007) the introduction of the grant. A fixed-effects spatial lag model is used to study the (possible) spatial interactions among municipalities. Interestingly, the results show that during the first time period, the municipalities interact with their neighbors when setting the expenditure level, possibly due to mimicking. In the second time period, after the introduction of the grant, there is no evidence of interaction. This would support the hypothesis that the governmental grants provide information to the municipalities and the need for mimicking diminishes with the grant.