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

Abstract

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