Intergovernmental grants and local democracy : An instrumental variable analysis of the equalization grant’s effects on municipal spendings, tax rates and local election outcomes

The aim of this paper is to study two separate but yet connected effects of an increase in the Swedish equalization grant. More specifically this paper investigates the grant’s effect on municipal spending and tax rates as well as incumbent party(ies) probability to remain in office during 2014 and 2018. Previous literature has focused primarily on what effects intergovernmental grants have on national elections and less on their effects at the local level. By looking at the local level this paper aspires to broaden the knowledge base regarding grants effect on election turnout. In order to do this, an instrumental variable approach is applied. The paper mainly finds statistically significant results regarding local spending and tax rates where bigger grants seems to induce more public spending and small increases in tax rates. Concerning the effect of grants on local governments chances to remain in office the results are insignificant