Fiscal transfers to local governments and the distribution of economic activity

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, and higher public spending. These changes in local fiscal policy lead to an increase in private sector jobs. Our estimates imply a cost per job of e 33,000. 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.