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This paper investigates the effects of intergovernmental transfers on the development outcomes by exploiting a formula-based transfer scheme among the Philippine municipalities and cities. The results suggest that the household disposable income per capita increases 9.6 percent in the long run as a result of extra transfers of 1000 Philippine pesos per capita in the Philippine local governments. However, the poverty rate increases by around 5 percentage points in the long run. The income gains, associated with higher poverty rate, mainly occur in small and less-developed LGUs (i.e., municipalities). Furthermore, there exist a large stimulatory effect on localspending and a small effect on local tax revenue reduction due to extra grant transfers.