Intergovernmental Grants and Public Input Provision: Theory and Evidence from Germany

36 Pages Posted: 23 Jan 2007 Last revised: 26 Aug 2008

See all articles by Sebastian Hauptmeier

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics

Date Written: 2007

Abstract

This paper uses a simple model of fiscal competition between local jurisdictions to analyse the impact of intergovernmental grants on the composition of public spending. We find that a higher degree of redistribution within a system of fiscal equalisation coincides with a smaller overall share of spending on productivity-enhancing public inputs. Furthermore, in order to test the theoretical predictions, we carry out an empirical analysis based on a panel of German states. The results are consistent with the theoretical findings and support the existence of an incentive effect of intergovernmental grants on state expenditure policies.

Keywords: Fiscal competition, Fiscal equalisation, Intergovernmental grants, Public expenditure, Germany

JEL Classification: H72, H77

Suggested Citation

Hauptmeier, Sebastian, Intergovernmental Grants and Public Input Provision: Theory and Evidence from Germany (2007). ZEW - Centre for European Economic Research Discussion Paper No. 07-006, Available at SSRN: https://ssrn.com/abstract=958719 or http://dx.doi.org/10.2139/ssrn.958719

Sebastian Hauptmeier (Contact Author)

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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