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The Impact of Intergovernmental Grants on Cost Efficiency: Theory and Evidence from German Municipalities

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  • Kalb, Alexander

Abstract

In this paper we use a simple bureaucracy model of fiscal illusion to analyze the impact of intergovernmental grants on the cost efficiency of local jurisdictions. We find that a higher degree of redistribution within a system of fiscal equalization or an increase in the amount of grants received by a local jurisdiction leads to an extension of organizational slack or X-inefficiency in that jurisdiction. This theoretical prediction is tested by conducting an empirical analysis using a broad panel of German municipalities. The results of the empirical analysis are consistent with the theoretical findings and therefore support the existence of a negative incentive effect of intergovernmental grants on local authorities' cost efficiency.

Suggested Citation

  • Kalb, Alexander, 2008. "The Impact of Intergovernmental Grants on Cost Efficiency: Theory and Evidence from German Municipalities," ZEW Discussion Papers 08-051, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:7361
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    Cited by:

    1. Geys, Benny & Konrad, Kai A., . "Federalism and optimal allocation across levels of governance," Chapters in Economics,, University of Munich, Department of Economics.
    2. Ivo Bischoff & Frédéric Blaeschke, 2010. "Conditional grants to independent regional governments: The trade-off between incentives and wasteful grant-seeking," MAGKS Papers on Economics 201030, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. Anna Montén & Christian Thater, 2011. "Determinants of Efficiency in Child-Care Provision," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 67(4), pages 378-403, December.
    4. Kalb, Alexander, 2009. "What determines local governments' technical efficiency? The case of road maintenance," ZEW Discussion Papers 09-047, ZEW - Leibniz Centre for European Economic Research.
    5. Haug, Peter, 2009. "Shadow Budgets, Fiscal Illusion and Municipal Spending: The Case of Germany," IWH Discussion Papers 9/2009, Halle Institute for Economic Research (IWH).
    6. Jonathan Eberle, 2019. "Regional fiscal equalization. A simultaneous equation approach to assess the economic effects of fiscal policy," Working Papers on Innovation and Space 2019-01, Philipps University Marburg, Department of Geography.

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    More about this item

    Keywords

    Cost efficiency; Fiscal equalisation; Intergovernmental grants; Bureaucracy; Stochastic frontier analysis; German municipalities;
    All these keywords.

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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