When the money stops: fiscal and political reactions to changing grant eligibility

We study the incentive effects of vertical equalization transfers in France. Using a reform in 2017 that tightened eligibility criteria for an equalization grant, we analyze how grant losses affect municipal budget choices. Drawing on a large panel of urban municipalities covering the 2014–2024 period, we employ a staggered difference-in-differences framework to identify the causal impact of grant losses. We first show that, on average, municipalities substitute grants with local tax revenues. Second, political factors reveal heterogeneity in responses. Left-wing municipalities increase spending and simultaneously raise taxes and debt. In contrast, right-wing municipalities increase taxes but consolidate debt. Municipalities led by narrowly elected mayors pursue stronger fiscal discipline, reducing expenditures and debt. Political fragmentation within municipal councils generates patterns consistent with coalition bargaining.