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Optimal Design of Intergovernmental Grants under Asymmetric Information

Listed author(s):
  • Bernd Huber
  • Marco Runkel

This paper develops a theoretical explanation why it may be optimal for higher-level governments to pay categorical block grants or closed-ended matching grants to local governments. We consider a federation with two types of local governments which differ in the cost of providing public goods. The federal government redistributes between jurisdictions, but cannot observe the type of a jurisdiction. In this asymmetric information setting it is shown that the second-best optimum can be decentralized with the help of categorical block grants and closed-ended matching grants, but not with unconditional block grants or open-ended matching grants.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2003/wp-cesifo-2003-04/cesifo_wp919.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 919.

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Date of creation: 2003
Handle: RePEc:ces:ceswps:_919
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