Arbeitspapier

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

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.

Language
Englisch

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

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

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

Handle
Last update
10.03.2025, 11:44 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Kalb, Alexander
  • Zentrum für Europäische Wirtschaftsforschung (ZEW)

Time of origin

  • 2008

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