DP15384 Fiscal transfers, local government, and entrepreneurship

Author(s):	Piotr Danisewicz, Steven Ongena
Publication Date:	October 2020
Keyword(s):	"Fuzzy" Regression Disconti-nuity Design, entrepreneurship, Fiscal Transfers, Local government spending
JEL(s):	E62, H71, H72, L26, P16
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=15384

Can local government spending spur entrepreneurial activity? To answer this question we study Poland where municipalities with lower tax revenues receive direct monetary grants from the national budget that vary at multiple pre-determined and non-manipulable thresholds. Employing a fuzzy regression discontinuity design, we find a positive impact of fiscal transfers on the number of firms, especially sole proprietorships and small firms. The impact is stronger in municipalities where the opposition is more involved in the legislative process or more parties are represented in the municipal council, and in regions where historical legacies shaped a more positive attitude towards entrepreneurship.