Optimal Design of Intergovernmental Grants Under Asymmetric Information |
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Authors: | Bernd Huber Marco Runkel |
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Institution: | (1) Department of Economics, University of Munich, Ludwigstr. 28, Vgb., III, D-80539 Munich, Germany |
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Abstract: | This paper develops a theoretical explanation why it may be optimal for higher-level governments to pay categorical block
grants or closed-ended matching grants to local governments. We consider a federation with two types of local governments
which differ in the cost of providing public goods. The federal government redistributes between jurisdictions, but cannot
observe the type of a jurisdiction. In this asymmetric information setting, it is shown that the second-best optimum can be
implemented with the help of categorical block grants and closed-ended matching grants, but not with unconditional block grants
or open-ended matching grants.
JEL Code: H77, D82 |
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Keywords: | asymmetric information categorical block grants closed-ended matching grants |
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