Intergovernmental Grants, Fiscal Autonomy, and Local Budgeting: Evidence of Reference Dependence From Korea

Abstract This study employs a panel threshold regression to examine how own‐source revenues and unconditional grants affect internal expenditures of Korean local governments. Guided by mental accounting theory, we argue that revenue sources create distinct “accounts,” shaping expenditure choices. Results reveal two thresholds (0.310% and 0.401%) beyond which the effect of own‐source revenues on internal spending declines sharply, while the grant effect remains stable. This loss‐averse pattern suggests that excessive reliance on unconditional transfers can weaken fiscal autonomy, highlighting the need to redesign intergovernmental grants to mitigate inefficiencies.