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

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  • Alexander Kalb

    ()
    (Centre for European Economic Research (ZEW) and University of Heidelberg, L 7, 1 68161 Mannheim, Germany)

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    Abstract

    In this paper we use a simple bureaucracy model of fiscal illusion to analyse 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 equalisation or an increase in the amount of grants received by a local jurisdiction leads to an extension of organisational 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.

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    Bibliographic Info

    Article provided by Queensland University of Technology (QUT), School of Economics and Finance in its journal Economic Analysis and Policy (EAP).

    Volume (Year): 40 (2010)
    Issue (Month): 1 (March)
    Pages: 21-63

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    Handle: RePEc:eap:articl:v40:y:2010:i:1:p:21-63

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    Related research

    Keywords: Cost efficiency; Fiscal equalisation; Intergovernmental grants; Bureaucracy; Stochastic frontier analysis; German municipalities;

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    References

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    1. Geys, Benny & Heinemann, Friedrich & Kalb, Alexander, 2010. "Voter involvement, fiscal autonomy and public sector efficiency: Evidence from German municipalities," European Journal of Political Economy, Elsevier, vol. 26(2), pages 265-278, June.
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    19. Moesen, Wim & van Cauwenberge, Philippe, 2000. " The Status of the Budget Constraint, Federalism and the Relative Size of Government: A Bureaucracy Approach," Public Choice, Springer, vol. 104(3-4), pages 207-24, September.
    20. Christos Kotsogiannis & Robert Schwager, 2006. "Fiscal Equalization and Yardstick Competition," Working Papers 2006-15, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
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    Cited by:
    1. Asatryan, Zareh & De Witte, Kristof, 2014. "Direct democracy and local government efficiency," ZEW Discussion Papers 14-017, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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