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Vertical Grants and Local Public Efficiency

Author

Listed:
  • Bischoff, Ivo
  • Bönisch, Peter
  • Haug, Peter
  • Illy, Annette

Abstract

This paper analyses the impact of vertical grants on local public sector efficiency. First, we develop a theoretical model in which the bureaucrat sets the tax price while voters choose the quantity of public services. We use a very simple theoretical model to show that grants reduce efficiency even if voters do not suffer from fiscal illusion. Second, we use the model and the fact that vertical financial equalization systems often reduce differences in fiscal capacity to argue that empirical studies based on cross-sectional data may yield a positive relationship between grants and efficiency even when the underlying causal effect is negative. Third, we perform an empirical analysis for the German state of Saxony-Anhalt, which has implemented such a fiscal equalization system. The empirical patterns we observe support the argument that the fiscal equalization system may have this inference-disturbing effect.

Suggested Citation

  • Bischoff, Ivo & Bönisch, Peter & Haug, Peter & Illy, Annette, 2014. "Vertical Grants and Local Public Efficiency," IWH Discussion Papers 1/2013, Halle Institute for Economic Research (IWH).
  • Handle: RePEc:zbw:iwhdps:iwh-1-13
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    References listed on IDEAS

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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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    3. Haug, Peter, 2013. "Grant Dependence, Regulation and the Effects of Formula-based Grant Systems on German Local Governments: A Data Report for Saxony-Anhalt," IWH Discussion Papers 2/2013, Halle Institute for Economic Research (IWH).
    4. De Borger, Bruno & Kerstens, Kristiaan, 1996. "Cost efficiency of Belgian local governments: A comparative analysis of FDH, DEA, and econometric approaches," Regional Science and Urban Economics, Elsevier, vol. 26(2), pages 145-170, April.
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    6. Balaguer-Coll, Maria Teresa & Prior, Diego & Tortosa-Ausina, Emili, 2007. "On the determinants of local government performance: A two-stage nonparametric approach," European Economic Review, Elsevier, vol. 51(2), pages 425-451, February.
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    10. Geys, Benny & Heinemann, Friedrich & Kalb, Alexander, 2007. "Local Governments in the Wake of Demographic Change: Efficiency and Economies of Scale in German Municipalities," ZEW Discussion Papers 07-036, ZEW - Leibniz Centre for European Economic Research.
    11. Wyckoff, Paul Gary, 1990. "The Simple Analytics of Slack-Maximizing Bureaucracy," Public Choice, Springer, vol. 67(1), pages 35-47, October.
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    Cited by:

    1. Ivo Bischoff & Stefan Krabel, 2017. "Local taxes and political influence: evidence from locally dominant firms in German municipalities," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(2), pages 313-337, April.
    2. Isabel Narbón-Perpiñá & Kristof De Witte, 2016. "Local governments’ efficiency: A systematic literature review – Part II," Working Papers 2016/21, Economics Department, Universitat Jaume I, Castellón (Spain).
    3. Blaeschke, Frédéric & Haug, Peter, 2014. "Does Intermunicipal Cooperation Increase Efficiency? Evidence from the Hessian Wastewater Sector," IWH Discussion Papers 11/2014, Halle Institute for Economic Research (IWH).
    4. Haug, Peter, 2013. "Grant Dependence, Regulation and the Effects of Formula-based Grant Systems on German Local Governments: A Data Report for Saxony-Anhalt," IWH Discussion Papers 2/2013, Halle Institute for Economic Research (IWH).
    5. Isabel Narbón-Perpiñá & Kristof De Witte, 2016. "Local governments’ efficiency: A systematic literature review – Part I," Working Papers 2016/20, Economics Department, Universitat Jaume I, Castellón (Spain).

    More about this item

    Keywords

    vertical grants; local public finance; efficiency; DEA; bureaucracy; Vertikale Zuweisungen; Kommunalfinanzen; Effizienz; DEA; Bürokratie;

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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