The Dynamic Behavior of Norwegian Municipalities : An Analysis of Local Government Spending 1972-2008

The aim of this thesis is to develop a framework for analyzing municipal spending behavior over a long time dimension. A panel data set for the period 1974 to 2008 containing expenditure data and other characteristics for all the municipalities constitute the basis of the analysis. We suggest an econometric model specification which is flexible enough to incorporate the major institutional and social changes of the period. We also propose and estimate three models over the full period. One static model, one partial adjustment model without and one partial adjustment model with autocorrelated errors. A discrepancy between the static and the dynamic parameter estimates is found and investigated, but the source has not been uncovered. Analysis of the dynamic models revealed that net operational deficits in preceding years lead to a strengthening of the net operational surplus, which is in line with budget rules imposed on the municipalities. By allowing for heterogeneous adjustment speed in the dynamic models we find that large municipalities adapt more sluggish than small ones to shifting demand. This means that small municipalities implement desired allocation changes faster