Funding Versus Control in Intergovernmental Relations

Governmental programs are occasionally required by one level of government in a federal system, but funded through taxes or fees raised at another level. This arrangement creates opportunities for one government to exploit the fund-raising capabilities of another. But separating the functions of mandating and funding the program may, in some instances, generate a more efficient allocation of collective goods. A review of mechanisms that might be used to restrict this arrangement to situations in which efficient collective goods provision can be assured reveals that the relationship between central and decentralized governments provides the best protection against exploitation.