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Formula Funding of Public Services: An Economic Analysis

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  • Peter C. Smith

Abstract

This paper discusses the economic implications of distributing funds for devolved public services using mechanical formulae. The rationale for using such methods is that they will contribute to the increased efficiency and equity of public services. By acting as arbiters in complex bargaining situations, they also serve important political objectives. The principles of formula funding are examined from an economic perspective, using a production-function approach. As well as yielding major benefits, formula funding has the potential for introducing perverse incentives and risk-avoidance behaviour, particularly among smaller units such as schools and general practices. Strategies for avoiding adverse outcomes are discussed, and the broader political context within which formula funding operates is examined. The paper ends with an assessment of the priorities for future developments in formula funding. Copyright 2003, Oxford University Press.

Suggested Citation

  • Peter C. Smith, 2003. "Formula Funding of Public Services: An Economic Analysis," Oxford Review of Economic Policy, Oxford University Press, vol. 19(2), pages 301-322, Summer.
  • Handle: RePEc:oup:oxford:v:19:y:2003:i:2:p:301-322
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    Cited by:

    1. Schang, Laura & Hynninen, Yrjänä & Morton, Alec & Salo, Ahti, 2016. "Developing robust composite measures of healthcare quality – Ranking intervals and dominance relations for Scottish Health Boards," Social Science & Medicine, Elsevier, vol. 162(C), pages 59-67.
    2. Peter Friedrich & Joanna Gwiazda & Chang Woon Nam, 2003. "Development of Local Public Finance in Europe," CESifo Working Paper Series 1107, CESifo Group Munich.
    3. Mihály Fazekas, 2012. "School Funding Formulas: Review of Main Characteristics and Impacts," OECD Education Working Papers 74, OECD Publishing.
    4. Guccio, Calogero & Mazza, Isidoro, 2014. "On the political determinants of the allocation of funds to heritage authorities," European Journal of Political Economy, Elsevier, vol. 34(C), pages 18-38.
    5. James Gallagher & Daniel Hinze, "undated". "Financing Options for Devolved Government in the UK," Working Papers 2005_24, Business School - Economics, University of Glasgow.
    6. Adam Oliver, 2005. "The English National Health Service: 1979-2005," Health Economics, John Wiley & Sons, Ltd., vol. 14(S1), pages 75-99.
    7. Gloria Agyemang, 2010. "Accounting for needs? Formula funding in the UK schools sector," Accounting, Auditing & Accountability Journal, Emerald Group Publishing, vol. 23(1), pages 82-110, January.
    8. Nagy, Balázs, 2010. "Egy hiányzó láncszem?. Forráselosztás a magyar egészségügyben
      [Resource allocation in Hungarian health care - is there a missing link?]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(4), pages 337-353.

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