Abstract: This thesis analyzes intergovernmental grants and their effect on subnational fiscal decisions. On the one hand, explores whether the receipt of transfers may cause an income effect that reduces the collection effort made by municipalities. We find empirical
evidence that for Chilean municipalities, unconditional grants have a negative effect on local revenue. On the other hand, equalization grants that are inversely related to collected revenue actually discourage revenue collection. This grant increases the marginal cost of
collecting because it taxes the collection itself. We find a negative relationship between the equalization grant’s implicit tax and collected local revenue, and this effect is greater when the period of time between collection and the corresponding distribution of grants
is shorter and when the political coalition to which the incumbent mayor belongs has a high likelihood of winning the next election and therefore paying this implicit tax in the coming years. In order to identify these effects, we exploit the characteristics of the
Chilean distribution formula and the reforms made to it from 1990 to 2007, which could be considered exogenous from the viewpoint of a municipality. Research utilizes data for a panel of 340 Chilean municipalities during the 1990-2007 period.