EVALUATING THE EFFECTS OF LOCAL TRANSFERS: EVIDENCE FROM FRANCE

Abstract

This paper uses the exogenous local transfers (DGF - dotation globale de fonctionnement) reduction to evaluate the effects of local transfers on its employment in France. However, a challenge to this is that the amount of DGF allocations are endogenous to the economic conditions. To address this, I use a component of the transfers as an instrument (CRPF – Contribution to the Recovery of Public Finances) to isolate the exogenous variation of the transfers. I find that cutting DGF allocations by 1 percent can lead to a 0.51 percent growth in unemployment. I further examine the effects of local transfers of across compositions of demography and public finances and find heterogenous effects of DGF. Lastly, I estimate the local consumption multiplier of -2.35 on unemployment for France and discusses how this estimate provide implications on the role of local transfers in fiscal policy and alleviating unemployment.