The Dual-Illusion of Grants-in-Aid on Central and Local Expenditures

The purpose of this paper is to clarify some misspecificationsthat prevail in the dual-illusion hypothesis, which is animportant influential theory in fiscal illusion studies. Avoter's behavior can hence be self-fulfilling, and the ``dual-illusion'' will not contradict each other. Our findings alsosupport what the dual-illusion hypothesis expects – that aidraises the demand for recipient government output and reducesthe demand for grantor government output. The intergovernmentgrants therefore do appear to be a common source of fiscalillusion.