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

Alexander Kalb

No 08-051, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

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.

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: 2008
New Economics Papers: this item is included in nep-eff, nep-pbe and nep-ure
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:7361

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