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Optimal design of intergovernmental grants under asymmetric information

Bernd Huber and Marco Runkel ()

Munich Reprints in Economics from University of Munich, Department of Economics

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.

Date: 2006
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Published in International Tax and Public Finance 1 13(2006): pp. 25-41

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Related works:
Journal Article: Optimal Design of Intergovernmental Grants Under Asymmetric Information (2006) Downloads
Working Paper: Optimal Design of Intergovernmental Grants under Asymmetric Information (2003) Downloads
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