Welfare financing: Grant allocation and efficiency
Welfare is often administered locally, but financed through grants from the central government. This raises the question how the central government can prevent local governments from spending more than necessary. Block grants are more efficient than matching grants, because the latter reduce the local governments? incentive to limit welfare spending. However, conventional block grant financing is less equitable, indeed, it may put a heavy burden on local governments in economically weak regions. This paper considers block grants which depend on exogenous spending need determinants, and are estimated from previous period welfare spending. This allocation method gives rise to perverse incentives by reducing the marginal costs of welfare spending. We derive the conditions for such a grant to be more efficient than a matching grant, and apply our results to the Netherlands, where such a grant exists since 2004. We conclude that the Dutch style grant is likely to be more efficient than a matching grant. As it is also more equitable, other countries might want to consider introducing a similar grant.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +31 50 363 7185
Fax: +31 50 363 3720
Web page: http://som.eldoc.ub.rug.nl/Email:
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nobuo Akai & Emilson Silva, 2009. "Interregional redistribution as a cure to the soft budget syndrome in federations," International Tax and Public Finance, Springer, vol. 16(1), pages 43-58, February.
- Richard C. Cornes & Emilson C.D. Silva, 1996.
"Local Public Goods, Inter-Regional Transfers and Private Information,"
Keele Department of Economics Discussion Papers (1995-2001)
96/11, Department of Economics, Keele University.
- Cornes, Richard C. & Silva, Emilson C. D., 2002. "Local public goods, inter-regional transfers and private information," European Economic Review, Elsevier, vol. 46(2), pages 329-356, February.
- Bradbury, Katharine & Zhao, Bo, 2009. "Measuring Non–School Fiscal Disparities among Municipalities," National Tax Journal, National Tax Association, vol. 62(1), pages 25-56, March.
- Rebecca M. Blank, 2002.
"Evaluating Welfare Reform in the United States,"
NBER Working Papers
8983, National Bureau of Economic Research, Inc.
- Bernd Huber & Marco Runkel, 2003.
"Optimal Design of Intergovernmental Grants under Asymmetric Information,"
CESifo Working Paper Series
919, CESifo Group Munich.
- Bernd Huber & Marco Runkel, 2006. "Optimal Design of Intergovernmental Grants Under Asymmetric Information," International Tax and Public Finance, Springer, vol. 13(1), pages 25-41, January.
- Huber, Bernd & Runkel, Marco, 2006. "Optimal design of intergovernmental grants under asymmetric information," Munich Reprints in Economics 19392, University of Munich, Department of Economics.
- Akai, Nobuo & Sato, Motohiro, 2008. "Too big or too small? A synthetic view of the commitment problem of interregional transfers," Journal of Urban Economics, Elsevier, vol. 64(3), pages 551-559, November.
- Alan Duncan & Peter Smith, 1995. "Modelling local government budgetary choices under expenditure limitation," Fiscal Studies, Institute for Fiscal Studies, vol. 16(4), pages 95-110, November.
- James M. Buchanan, 1952. "Federal Grants and Resource Allocation: A Reply," Journal of Political Economy, University of Chicago Press, vol. 60, pages 536.
- Bucovetsky, Sam, 1998. "Federalism, equalization and risk aversion," Journal of Public Economics, Elsevier, vol. 67(3), pages 301-328, March.
- Marie-Laure Breuillé & Robert J. Gary-Bobo, 2005.
"Sharing Budgetary Austerity under Free Mobility and Asymmetric Information: An Optimal Regulation Approach to Fiscal Federalism,"
CESifo Working Paper Series
1559, CESifo Group Munich.
- Breuille, Marie-Laure & Gary-Bobo, Robert J., 2007. "Sharing budgetary austerity under free mobility and asymmetric information: An optimal regulation approach to fiscal federalism," Journal of Public Economics, Elsevier, vol. 91(5-6), pages 1177-1196, June.
- Riordan, Michael H. & Sappington, David E. M., 1988. "Optimal contracts with public ex post information," Journal of Economic Theory, Elsevier, vol. 45(1), pages 189-199, June.
- Katherine Baicker, 2005. "Extensive or Intensive Generosity? The Price and Income Effects of Federal Grants," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 371-384, May.
- Bird, Richard M. & Smart, Michael, 2002. "Intergovernmental Fiscal Transfers: International Lessons for Developing Countries," World Development, Elsevier, vol. 30(6), pages 899-912, June.
- Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
- Allers, Maarten A., 2012. "Yardstick competition, fiscal disparities, and equalization," Economics Letters, Elsevier, vol. 117(1), pages 4-6.
- Howard Chernick, 1998. "Fiscal Effects of Block Grants for the Needy: An Interpretation of the Evidence," International Tax and Public Finance, Springer, vol. 5(2), pages 205-233, May.
- Le Grand, Julian, 1975. "Fiscal Equity and Central Government Grants to Local Authorities," Economic Journal, Royal Economic Society, vol. 85(339), pages 531-47, September.
- Buchanan, James M. & Goetz, Charles J., 1972. "Efficiency limits of fiscal mobility: An assessment of the tiebout model," Journal of Public Economics, Elsevier, vol. 1(1), pages 25-43, April.
- Breuillé, Marie-Laure & Madiès, Thierry & Taugourdeau, Emmanuelle, 2010. "Gross versus net equalization scheme in a federation with decentralized leadership," Journal of Urban Economics, Elsevier, vol. 68(2), pages 205-214, September.
- James M. Buchanan, 1952. "Federal Grants and Resource Allocation," Journal of Political Economy, University of Chicago Press, vol. 60, pages 208.
- Marko Koethenbuerger, 2003.
"Tax Competition in a Fiscal Union with Decentralized Leadership,"
CESifo Working Paper Series
943, CESifo Group Munich.
- Kothenburger, Marko, 2004. "Tax competition in a fiscal union with decentralized leadership," Journal of Urban Economics, Elsevier, vol. 55(3), pages 498-513, May.
- Strausz, Roland, 2005.
"Interim Information in Long Term Contracts,"
Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems
40, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer, vol. 9(4), pages 409-421, August.
- David C. Ribar & Mark O. Wilhelm, 1999. "The Demand for Welfare Generosity," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 96-108, February.
- Horst Raff & John Wilson, 1997. "Income Redistribution with Well-Informed Local Governments," International Tax and Public Finance, Springer, vol. 4(4), pages 407-427, November.
When requesting a correction, please mention this item's handle: RePEc:dgr:rugsom:12004-eef. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joke Bulthuis)
If references are entirely missing, you can add them using this form.