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Title:The Impact of Intergovernmental Grants on Cost Efficiency: Theory and Evidence from German Municipalities PDF Logo
Authors:Kalb, Alexander
Issue Date:2008
Series/Report no.:ZEW Discussion Papers 08-051
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.
Subjects:Cost efficiency
Fiscal equalisation
Intergovernmental grants
Bureaucracy
Stochastic frontier analysis
German municipalities
JEL:H11
H77
Document Type:Working Paper
Appears in Collections:ZEW Discussion Papers
Publikationen von Forscherinnen und Forschern des ZEW

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