Fiscal and Spending Behavior of Local Governments: Identification of Price Effects when Prices are not Observed

This paper analyzes local public fiscal andspending behavior in a setting where localgovernments, represented by the dominantparty or coalition, are treated as utilitymaximizing agents. The econometricanalysis, which is based on a modifiedversion of ELES, recognizes total spendingas well as total income as endogenousvariables. Identification of the priceeffects is achieved by utilizing data onenvironmental cost factors and localtastes. The performance of the estimatedmodel is investigated by testing itsability to make out-of-sample predictionsof local government behavior.