Are local governments governed by forward looking decision makers? An investigation of spending patterns in Swedish municipalities

In this paper we investigate the extent to which local government consumption in Sweden is determined by permanent rather than current resources. Evidence from a panel of municipalities indicates that most consumption (90% or more) is associated with permanent resources. That is, spending decisions on nondurable goods and services in Swedish municipalities are to a very high degree determined by rational, forward looking decision makers. This result contrasts sharply with the common view that local governments do not act intertemporally. One policy implication is that it can be difficult for the central government to conduct stabilization policy by influencing the municipalities' current resources. (C) 1998 Academic Press.