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Intergovernmental grants and financial autonomy under asymmetric information

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  • Herold, Katharina

Abstract

This paper analyses and compares the efficiency of alternative incentive compatible grant schemes under asymmetric information relieving subnational governments of excessive debt burden. They allow intervention into local debt, local tax or complete local fiscal policy. In the first case, separation of types can be induced by forcing recipients to inefficient high borrowing and in the second case by imposing inefficient high tax rates. In the last case, fiscal policy of the recipient region is distorted in the period of the exogenous shock. We show that constraining complete financial autonomy leads to the lowest welfare losses. This is due to the fact that complete regulation of local fiscal policy reduces the incentive of contributing local governments to defect from truthful relevation.

Suggested Citation

  • Herold, Katharina, 2009. "Intergovernmental grants and financial autonomy under asymmetric information," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 09-2, University of Cologne, FiFo Institute for Public Economics.
  • Handle: RePEc:zbw:uoccpe:092
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    References listed on IDEAS

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    1. repec:rom:rampas:v:2015:y:2015:i:25:p:6-26 is not listed on IDEAS

    More about this item

    Keywords

    vertical transfers; subnational debt; asymmetric information adverse selection; financial autonomy;

    JEL classification:

    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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