This paper utilizes an experiment among Norwegian municipalities to investigate their responsiveness to price changes. More specifically we estimate the effect on the supply of child care from a change in central government grants. During the four year period of 2000-2003, a group of 20 municipalities had most of their matching grants from the central government turned into general grants. The grant to child care was the economically most important of these grants, and we explore the expected results theoretically through a two-period numerical model. For the empirical analyses, the small sample of participating municipalities and the method by which they were selected creates some challenges. Using a matching procedure to select a suitable control group, we find that the experiment municipalities on average did expand their child care sector less than municipalities in the control group during the period. The difference measured towards the end of the experiment was largely offset by a faster expansion of child care supply in the experiment municipalities the first year after the financing returned to normal. The resulting Marshallian own-price elasticity comes out as inelastic, estimates ranging between -0.08 and -0.16, and we discuss some factors regarding the political setting and the experiment itself that may have contributed to such a small response to the quite large change in relative prices.
