Abstract. This article finds that about 31 cents of every dollar of matching conditional grants to upper-tier municipalities in Ontario, Canada were converted into fungible resources during the period 1977–1992. As a result these grants did not stimulate local economic activities, as desired by the donor. In particular, the expenditure response to these grants is reduced by almost 25 percent due to fungibility. The implied fungibility ratio is also found to vary across municipalities and service categories. Fungibility of grants is 15 percent higher in the transportation sector than in the health sector and in both sectors the estimated ratio is lower than the corresponding ratio based on U.S. data. It is further found that a municipality, with a regional structure, larger size, and lower proportion of statutory expenditure, tends to convert larger amounts of grants into fungible resources than others.