Dynamic Effects of Public Expenditure: The Challenge of Multi‐Level Governance Systems

The public economy literature shows that dynamic effects of public expenditure vary across programs, giving governments incentives to allocate spending with precision. However, this may be difficult in multi‐level governance, where centrally funded expenditure is implemented locally. While largely ignored in the dynamic effects literature, this problem is central to fiscal federalism research. We draw on these insights to argue that it is difficult for central government to control expenditure at the local level. Empirically, we study intergovernmental grants in Denmark and find that local governments spend only part of the funds as intended. We discuss implications for future research.