The Determinants of the Incidence of Intergovernmental Grants: A Survey of the International Experience

Abstract

Although the presence of objective formula-based grants is an important component of a stable, equitable and efficient system of intergovernmental fiscal relations, the final incidence of grants is not always according to what is stated in the formula because there are other intervening institutional factors. Furthermore, the intergovernmental grant mechanism itself is often a function of the same interests or forces that ultimately drive the incidence of grant resources. This paper relates the horizontal allocation of intergovernmental grants directly to their potential underlying determinants, including normative policy issues, voter choice arguments and political considerations. An international comparison of empirical incidence studies reveals that besides local expenditure needs and local fiscal capacity, other factors including political influence and a jurisdiction's size play important and consistent roles in determining the horizontal allocation of per capita intergovernmental grants.