Vertical Grants and Local Public Efficiency: The Inference-disturbing Effect of Fiscal Equalization

Ivo Bischoff (), Peter Bönisch, Peter Haug and Annette Illy

Public Finance Review, 2019, vol. 47, issue 3, 558-584

Abstract: The existing empirical literature on the impact of vertical grants on local public-sector efficiency yields mixed results. Given the fact that vertical financial equalization systems often reduce differences in fiscal capacity, we argue that empirical studies based on cross-sectional data may yield a positive relationship between grants and efficiency of public service production even when the underlying causal effect is not. We provide a simple illustrative theoretical model to show the logic of our argument and illustrate its relevance by an empirical case study for the German state of Saxony-Anhalt. We show that our main argument of an inference-disturbing effect applies to those existing studies that are more optimistic about the impact of vertical grants. Finally, we argue that it may disturb the inference drawn from studies in a number of other countries where vertical grants—intended or not—concentrate in fiscally weak municipalities.

Keywords: vertical grants; local public finance; efficiency; DEA; bureaucracy (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:47:y:2019:i:3:p:558-584

DOI: 10.1177/1091142117725393

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