Optimal Design of Intergovernmental Grants under Asymmetric Information

Huber, Bernd und Runkel, Marco (2003): Optimal Design of Intergovernmental Grants under Asymmetric Information. CESifo Working Paper,

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 decentralized with the help of categorical block grants and closed-ended matching grants, but not with unconditional block grants or open-ended matching grants.

• Item Type: Paper
• Faculties: Economics; Economics > Chairs > Chair in Public Finance
• Subjects: 300 Social sciences > 330 Economics
• Language: English