Modeling method of local financial dependence: Evidence from Mongolia

Many countries have been striving to equalize the balance between the central government and sub-government financial disparities without considering political interference. This paper aims to summarize the theory of local financial federalism and propose an unprecedented model for identifying the factors that affect local financial dependence. The proposed model is based on a theoretical framework incorporating five assumptions and is applied through panel regression analysis. Utilizing panel data from 2013 to 2022 in 21 provinces of Mongolia, a total of nine variables have been identified and econometrically tested within the proposed model. The findings from the panel regression analysis reveal that local budget investment, local personal income tax, local property tax, and other local taxes positively impact the reduction of local financial dependence. However, it is observed that an increase in local budget expenditures and GDP leads to an escalation in local financial dependence.