Evaluation of socio-economic impact of Latvian municipal adjustment fund with regression discontinuity design model

The arrangement of the Latvian Municipal Adjustment Fund encompasses the concept of the average annual revenue of conditional inhabitant, where the original population numbers are modified by adding conditional values based upon the number of children, schoolchildren, retirement age persons and area of the municipality. Besides that, the annual corrections are based on the average assessed revenues. Depending upon the value of the average annual revenue of conditional inhabitant relative to national average cut-point, districts are defined as donors or recipients. As the main objective of the adjustment is the provision of the basic functions, the socio-economic impact of the adjustment has not been extensively studied. The research objective is the evaluation of the net direct impact of the adjustment on the socio-economic variables such as Gross Domestic Product, Gross Value Added, Net Migration and Social Payments both at the local and national level. To reach the research objective, the Regression Discontinuity Design method is applied. The method compared to other quasiexperimental design methods has its advantages, as additional pre-treatment variables are not needed. Moreover, the values of the dependent variable are measured only once at a single point of time. The results of the research at the micro level show that the adjustment at the national level contributes to the decline in Gross Domestic Product and Gross Value Added, increase in Net Migration and Social Payments burden. While the average impacts on the recipient district are positive for all socio-economic indicators concerned the negative impacts on the donor districts more than outweigh these gains. This would suggest that the revenue equalization funding has to be revised to avoid the negative socio-economic consequences in the future.