End of the line: The Effects of Intergovernmental Grants on Local Revenue: Evidence from Chile

This paper presents research on the effect of intergovernmental grants on local government revenue in Chile. Intergovernmental grants are endogenous and I exploit a kink in a component of the Chilean formula for resource distribution for a panel of 340 Chilean municipalities from 1990 to 2007. I find empirical evidence that for Chilean municipalities, intergovernmental grants have a negative effect on local revenue. Specifically, an increase in per capita grant amount of one standard deviation is associated with a decrease of between 0.25 and 0.32 standard deviations in local per capita revenue. This effect is not uniform for different kinds of local revenue.Fiscal decentralization, intergovernmental grants, local government revenue, local collection, regression kink design