No. 2/2020: The effect of central government grants on local educational policy

Abstract

The use of intergovernmental grants in educational policies may give rise to a conflict between gains attributable to local flexibility and central government’s intention to narrow gaps in school spending and resource use across local jurisdictions. This paper estimates the impact on school resources of a Norwegian central government grant intended to decrease the student-teacher ratio (group size) in primary school (grades 1-4). The grant was given to the 100 municipalities with the highest student-teacher ratio out of more than 400 municipalities. Using a difference-in-differences approach, we find that the grant did not have the intended effect of reducing the actual group size. Our results suggest that strong enforcement mechanisms are necessary for earmarked grants to affect local allocation of resources as intended by central governments, although this may come at the cost of reducing local flexibility.