The Korea Local Administration Review

This study aims to verify whether state subsidies serve as efficient resource allocation, such as the general subsidy theory. For this purpose, the panel threshold regression analysis was used based on the Fungibility hypothesis. The analysis targets were designated as basic local governments between 2014 and 2018.
There was a threshold effect of financial self-reliance in the Fungibility phenomenon in the “city” and “county”, but there was no threshold effect of financial self-reliance in the “district”. In the case of city, a single threshold effect existed and was divided into two regimes. It was analyzed that the upper regime with relatively high financial self-reliance has a fungibility phenomenon. On the other hand, it was found that there was no fungibility phenomenon of state subsidies in the lower-level regime activities with relatively low financial self-reliance, indicating that efficient resource compilation was being carried out. In the case of the county, double threshold effects existed depending on financial self-reliance. There was a Fungibility phenomenon in every regimes. And it was analyzed that the Fungbility phenomenon is occurring more and more with higher financial self-reliance. lastly, the district was analyzed to have no threshold effect. As a result of estimating the value of the Fungiblity coefficient of the sphere through the linear fixed effect model, it was shown that the Fungiblity phenomenon did not exist.
Based on the results of this study, it may be assumed that the higher the financial self-reliance, the higher the Fungibility phenomenon, but not an absolute factor. However, the results of this study suggest that local governments at the ‘county’ level are more likely to be oversubscribing for state-subsidized projects than are required.