Local Authority Expenditure Decisions: A Maximum Likelihood Analysis of Budget Setting in the Face of Piecewise Linear Budget Constraints *

As a result of the system of central government grants-in-aid, local authorities in England have until recently faced piecewise linear budget constraints. A two-error estimation technique is used to analyze local authority expenditure decisions given these nonlinear budget constraints, and simulations of alternative grant regimes are considered. The empirical work is applied to local authorities in England from 1983-84 to 1988-89, a period during which the government was actively using the grant system in an attempt to restrain local authority.