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

34 Pages Posted: 13 Aug 2008

See all articles by Alexander Kalb

Alexander Kalb

ZEW – Leibniz Centre for European Economic Research

Date Written: 2008

Abstract

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.

Keywords: Cost efficiency, Fiscal equalisation, Intergovernmental grants, Bureaucracy, Stochastic frontier analysis, German municipalities

JEL Classification: H11, H77

Suggested Citation

Kalb, Alexander, The Impact of Intergovernmental Grants on Cost Efficiency: Theory and Evidence from German Municipalities (2008). ZEW - Centre for European Economic Research Discussion Paper No. 08-051, Available at SSRN: https://ssrn.com/abstract=1222494 or http://dx.doi.org/10.2139/ssrn.1222494

Alexander Kalb (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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