Resource title

The Impact of Intergovernmental Grants on Cost Efficiency: Theory and Evidence from German Municipalities

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Resource description

In this paper we use a simple bureaucracy model of fiscal illusion to analyze the impact of intergovernmental grants on the cost efficiency of local jurisdictions. We find that a higher degree of redistribution within a system of fiscal equalization or an increase in the amount of grants received by a local jurisdiction leads to an extension of organizational slack or X-inefficiency in that jurisdiction. This theoretical prediction is tested by conducting an empirical analysis using a broad panel of German municipalities. The results of the empirical analysis are consistent with the theoretical findings and therefore support the existence of a negative incentive effect of intergovernmental grants on local authorities' cost efficiency.

Resource author

Alexander Kalb

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Resource publish date

Resource language

eng

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text/html

Resource resource URL

http://hdl.handle.net/10419/24747

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Adapt according to the presented license agreement and reference the original author.