The design and effects of intergovernmental transfers : the case of Turkish municipalities

In this thesis, we test the effect of intergovernmental grants on municipal spending in Turkey. In our analysis, we incorporate Turkey's institutional features in modelling local authority behaviour. We give evidence on the results of incorporating dynamic elements into the expenditure equation in order to explain the variation in municipal expenditure. Our findings also throw light on the existence of the flypaper effect in the dynamic estimation. In our analysis, by using the method of the error correction mechanism (ECM), we also measure how quickly local government expenditure adjusts to its long-run growth path following a disturbance. We find that the past year's expenditure has a significant impact on current local expenditure. Our result in this respect contributes to the existing literature which seems to ignore the significant impact of previous expenditure on current local expenditure while estimating the demand for (or determinant of) local expenditure.;While identifying avenues for further theoretical and empirical research in the flypaper effect, Bailey and Connolly (1998) suggested that one of the most obvious avenues is the inclusion of dynamic elements into the exclusively static approach. This is in order to take account of time lags in adjusting the supply of local government services to the current demand conditions. An important contribution of this thesis is to satisfy Bailey and Connoly (1998)'s request by including the lagged municipal expenditure as an explanatory variable.;We also analyse the grant allocation in Turkey. We test empirically whether central government transfers to the municipalities are made on the basis of economic criteria, or in accordance with the political interest of politicians, and hence the coalition government. We find that equity and efficiency considerations do not appear to motivate the politicians, but neither is grant allocation apparently motivated by the desire to secure re-election.