When Does Money Stick in Education? Evidence from a Kinked Grant Rule

VATT Institute for Economic Research Working Papers 102, ISBN: 978-952-274-211-7

56 Pages Posted: 30 Jan 2018

See all articles by Antti Saastamoinen

Antti Saastamoinen

VATT Institute for Economic Research

Mika Kortelainen

Government of the Republic of Finland - VATT Institute for Economic Research; The University of Manchester

Date Written: January 22, 2018

Abstract

We study the effects of intergovernmental grants on school spending within the Finnish system of high school education funding. The system allocates lump-sum intergovernmental grants to local education organizers using a kinked grant rule. Utilizing the quasi-experimental variation in grants given by the rule, we identify the effects of grants on municipal high school education expenditures. Our results indicate that grants stimulate spending while local tax rates or revenues do not seem to be responsive to grants, thus suggesting the presence of a typical flypaper effect. However, we also consider the possibility that grant responses might be heterogeneous among municipalities. Based on our heterogeneity results, the grant response is positively associated with the share of high school age population, while the higher share of elderly is related to a lower propensity to spend on education out of grant funding. This result is in line with the idea of intergenerational conflict in education spending preferences often presented in education finance literature.

Keywords: intergovernmental transfers, flypaper effect, heterogeneous spending preferences, regression kink design

JEL Classification: I22,H75,H73

Suggested Citation

Saastamoinen, Antti and Kortelainen, Mika, When Does Money Stick in Education? Evidence from a Kinked Grant Rule (January 22, 2018). VATT Institute for Economic Research Working Papers 102, ISBN: 978-952-274-211-7, Available at SSRN: https://ssrn.com/abstract=3106576 or http://dx.doi.org/10.2139/ssrn.3106576

Antti Saastamoinen (Contact Author)

VATT Institute for Economic Research ( email )

Arkadiankatu 7
P.O Box 1279
Helsinki, 00101
Finland

Mika Kortelainen

Government of the Republic of Finland - VATT Institute for Economic Research ( email )

Arkadiankatu 7
P.O Box 1279
Helsinki, FIN-00531
Finland

The University of Manchester ( email )

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

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