We study the effects of intergovernmental grants on school spending
within the Finnish system of high school education funding. The system
allocates lump-sum intergovernmental grants to local high school
education providers using a kinked grant rule. Utilizing the
quasi-experimental variation in grants given by the rule, we identify
the effects of the grants on municipal high school education
expenditures. Our results indicate that the grants stimulate spending,
while local tax rates or revenues do not seem to be responsive to the
grants, suggesting the presence of a typical flypaper effect. However,
we also consider the possibility that the grant responses might be
heterogeneous among municipalities. Based on our heterogeneity results,
the grant response is positively associated with the share of the high
school age population, while a higher share of elderly persons is
related to a lower propensity to spend on education out of grant
funding. This result is in line with the idea of intergenerational
conflict in education spending preferences presented in education
finance literature.