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

Alexander Kalb ()
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Alexander Kalb: Centre for European Economic Research (ZEW) and University of Heidelberg, L 7, 1 68161 Mannheim, Germany

Economic Analysis and Policy, 2010, vol. 40, issue 1, 21-63

Abstract: In this paper we use a simple bureaucracy model of fiscal illusion to analyse 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 equalisation or an increase in the amount of grants received by a local jurisdiction leads to an extension of organisational 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.

Keywords: Cost efficiency; Fiscal equalisation; Intergovernmental grants; Bureaucracy; Stochastic frontier analysis; German municipalities (search for similar items in EconPapers)
JEL-codes: H11 H77 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v40:y:2010:i:1:p:21-63

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