MYOPIC OR FORWARD-LOOKING BEHAVIOR IN NORWEGIAN LOCAL GOVERNMNENTS? ASSESSING THE IMPACT OF THE NEW LOCAL GOVERNMENT ACT*)

Lars-Erik Borge and Per Tovmo

Department of Economics

Norwegian University of Science and Technology

Dragvoll

N-7034 Trondheim

Norway

Abstract:

The paper analyzes the intertemporal spending behavior of Norwegian local governments and investigates the impact of the new Local Government Act of 1992. One of the purposes of the new act was to encourage local governments to pay more attention to the long term consequences of their actions. Our main findings are: (i) On average 75 % of local governments spending decisions are determined by permanent resources. (ii) Local governments with good economic conditions behave more forward-looking than local governments with poorer economic conditions. (iii) Local governments with good economic conditions have utilized the increased intertemporal flexibility in the new Local Government Act. For the years after 1992, we cannot reject the hypothesis that spending decisions in these local governments are perfectly forward-looking.

*)The paper is a part of a research program on local government legislation. We are grateful for funding from the Norwegian Research Council.