Grant Impact on Local Fiscal Behavior: Full-Information Maximum Likelihood Estimates

Abstract

A wide variety of econometric studies have been conducted to determine Abstract whether conditional grants have a different effect upon local fiscal behavior than unconditional grants and to determine if unconditional grants reduce tax effort. Unfortunately, the studies have not finally resolved these questions. In this paper, a system of expenditure and tax equations are precisely derived from the Geary-Stone utility function. The system of equations is estimated simultaneously using a Full-Information Maximum Likelihood Estimator and the validity restrictions implied by the Geary-Stone utility function. The results indicate that conditional grants do not generally have a different impact upon local expenditures than unconditional grants and that unconditional grants do not seriously dampen local tax effort. Further, the results indicate that the Geary-Stone model is plausible.