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Optimal Design of Intergovernmental Grants Under Asymmetric Information

Bernd Huber () and Marco Runkel ()

International Tax and Public Finance, 2006, vol. 13, issue 1, 25-41

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. Copyright Springer Science + Business Media, Inc. 2006

Keywords: asymmetric information; categorical block grants; closed-ended matching grants (search for similar items in EconPapers)
Date: 2006
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Working Paper: Optimal design of intergovernmental grants under asymmetric information (2006)
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