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We study the economic effects of transfers to local governments
using a reform of the Finnish municipal grant system as a source
of exogenous variation. We find that higher grants lead to lower
municipal taxes and fees, higher public spending and improved budget
balance. These changes in local fiscal policy lead to an increase
in private sector jobs. Our estimates imply a cost per job
of e33,000. The increase in jobs is paired with a reduction in
commuting to other municipalities. The effect on migration seems
small, suggesting grants bring local benefits without drastically affecting
where households choose to live.
