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Comparing the distortionary effects of alternative in-kind intergovernmental transfers

This paper compares the distortions associated with alternative inter-governmental allocation rules when a central authority provides inputs for the provision of social services by local governments, and when local governments differ in their needs. Under a quantity-based mechanism, the input choices of high-need localities will tend to be distorted downwards. In order to convince the center of their higher needs, these communities signal their status by spending too little. However, under an expenditure-based mechanism the direction of distortion of the input choices of high-need localities depends on the price elasticity of demand for the local input. When demand is inelastic (elastic), in order to signal their high needs, high-need localities spend too much (little) on local inputs.

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Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~03-03-17.

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Date of creation: 03 Sep 2003
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Handle: RePEc:geo:guwopa:gueconwpa~03-03-17
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Georgetown University Department of Economics Washington, DC 20057-1036

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Order Information: Postal: Roger Lagunoff Professor of Economics Georgetown University Department of Economics Washington, DC 20057-1036
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  1. Bernd Huber & Marco Runkel, 2003. "Optimal Design of Intergovernmental Grants under Asymmetric Information," CESifo Working Paper Series 919, CESifo Group Munich.
  2. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 1998. "A theory of supervision with endogenous transaction costs," LSE Research Online Documents on Economics 19356, London School of Economics and Political Science, LSE Library.
  3. William Jack, 2004. "The Organization of Public Service Provision," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(3), pages 409-425, 08.
  4. Pranab Bardhan & Dilip Mookherjee, 1999. "Relative Capture of Local and Central Governments: An Essay in the Political Economy of Decentralization," Boston University - Institute for Economic Development 97, Boston University, Institute for Economic Development.
  5. Bordignon, Massimo & Manasse, Paolo & Tabellini, Guido, 1996. "Optimal Regional Redistribution Under Asymmetric Information," CEPR Discussion Papers 1437, C.E.P.R. Discussion Papers.
  6. Seabright, Paul, 1996. "Accountability and decentralisation in government: An incomplete contracts model," European Economic Review, Elsevier, vol. 40(1), pages 61-89, January.
  7. Richard C. Cornes & Emilson C. D. Silva, 2003. "Public Good Mix in a Federation with Incomplete Information," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 381-397, 04.
  8. Besley, Timothy J. & Ghatak, Maitreesh, 2001. "Government versus Private Ownership of Public Goods," CEPR Discussion Papers 2725, C.E.P.R. Discussion Papers.
  9. Laffont, Jean-Jacques & Martimort, David, 1998. "Transaction costs, institutional design and the separation of powers," European Economic Review, Elsevier, vol. 42(3-5), pages 673-684, May.
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