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

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ZEW Discussion Papers ; No. 08-051

Classification and Topics

• Classification: Wirtschaft ; Structure, Scope, and Performance of Government ; Intergovernmental Relations; Federalism; Secession
• Subject: Cost efficiency ; Fiscal equalisation ; Intergovernmental grants ; Bureaucracy ; Stochastic frontier analysis ; German municipalities ; Finanzausgleich ; Kommunaler Finanzausgleich ; Kommunalverwaltung ; Bürokratietheorie ; Technische Effizienz ; Fiskalillusion ; Wirtschaftlichkeit ; Theorie ; Deutschland ; organizational slack

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kalb, Alexander
• Event: Veröffentlichung
• (who): Zentrum für Europäische Wirtschaftsforschung (ZEW)
• (where): Mannheim
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/24747
• Last update: 10.03.2025, 11:44 AM CET