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 the 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 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, our results show that Norwegian municipalities did not increase teacher density in primary schools, despite receiving extra grants for this purpose. Though we cannot rule out that there was some take-up of our grant, we can exclude full take up. Our results suggest that strong enforcement mechanisms may be necessary for earmarked grants to affect local allocation of resources as intended by central governments, although this might come at the cost of reducing local flexibility.