This paper is an empirical analysis of Korean local government expenditures to test the fungibility hypothesis. We consider the following two points to test the hypothesis: First, we consider the fact that Korean local governments have no discretion t...
This paper is an empirical analysis of Korean local government expenditures to test the fungibility hypothesis. We consider the following two points to test the hypothesis: First, we consider the fact that Korean local governments have no discretion to change local tax rates. Second, we aloow the possibility of inverse fungibility, the hypotheisis that local governments convert some fraction of their own fungible resources into the provision of public service aided by conditional grants. Based on the utility maximizing model of local government and using expenditure and aid date for the category of the Industry-Economy Expenditure, we find the evidence of inverse fungibility. The result implies that the grants provided by the central government to the Industry-Economy Expenditure is no sufficient for the local government to implement the programs, and hence local governments should convert some fraction of their own fungible resources into the provision of the programs.