An Analyses of Formula-Based Intergovernmental Transfer Using A Comprehensive Model

Abstract

In this paper we analyze the tactics used by the central government during the allocation of grants toward local governments, by implementing the guidelines of the comprehensive model of Fiorillo and Merkaj (FM’s model) (2020)*. We apply the model to investigate a formula-based unconditional grant in a post-socialist economy, namely Albania, by assuming the value of three key structural parameters of the model. Using panel data for the period 2004-2011, we find that in Albania although the central government appears to follow the principles of equity and efficiency, political and electoral objectives of the incumbents do influence the allocation of transfers. Results confirm the predictions of the FM model: in a country with weak local government, where central government is perceived as the true policy maker even of local policies, in the presence of a proportional electoral rule, the incumbent tends to shape tactical allocation in favour of supporters.



*Fiorillo Fabio and Merkaj Elvina "A Comprehensive Approach to Intergovernmental Grants’ Tactical Allocation. Theory And Estimation Guidelines", submitted to International Tax and Public Finance (2020)

Keywords: formula-based intergovernmental transfers; Albania; empirical application of Fiorillo-Merkaj’s guideline

JEL Classification: H77