Fiscal and spending behavior of local governments : Identification of price effects when prices are not observed

Abstract

Abstract. This paper analyzes local public fiscal and spending behavior in a setting where local governments, represented by the dominant party or coalition, are treated as utility maximizing agents. The econometric analysis, which is based on a modified version of ELES, recognizes total spending as well as total income as endogenous variables. Identification of the price effects is achieved by utilizing data on environmental cost factors and local tastes. The performance of the estimated model is investigated by testing its ability to make out-of-sample predictions of local government behavior.