Local government grant system and location choices of households and firms

Fiscal transfers to local governments are a widely used tool to level disparities in public service level and local tax burdens. The local governments (in Finland municipalities) can use these grants for improved local public services or lower local taxes, which both improve the attractiveness of the area for households and firms. It has been argued that the grant system leads to efficiency losses by reducing mobility to high productivity areas, but convincing empirical evidence is missing.

This project studies the effects of local government grant system on the distribution of economic activity. We combine municipality level grant data with population wide micro-data on households and firms. Our empirical strategy is to use changes in the grant system in the 2000s as a quasi-experimental setting to isolate the impact of grants from other determinants of location choices of households and firms. In addition, we analyse how grants affect housing prices and rents.

Responsible researcher: Teemu Lyytikäinen, [email protected], +358 295 519 431