Matching versus General Grants: Local Government Response to Child-Care Subsidies

We study the effects of a Norwegian experimental scheme in which 20 participating municipalities had their earmarked grants from the central government converted into general grants. The experiment effectively doubled the marginal cost of supplying child care. We analyze the effect on child-care supply and compare the empirical findings with predictions from a numerical two-period model. Using a matching procedure to select a suitable control group, we find that the participating municipalities on average expanded their child-care sector less than municipalities in the control group. The empirical effects are small, considering the large change in relative prices.