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Huber, Bernd
Runkel, Marco
Year of Publication: 
Series/Report no.: 
CESifo Working Paper No. 919
This paper develops a theoretical explanation why it may be optimal for higher-level governments to pay categorical block grants or closed-ended matching grants to local governments. We consider a federation with two types of local governments which differ in the cost of providing public goods. The federal government redistributes between jurisdictions, but cannot observe the type of a jurisdiction. In this asymmetric information setting it is shown that the second-best optimum can be decentralized with the help of categorical block grants and closed-ended matching grants, but not with unconditional block grants or open-ended matching grants.
asymmetric information
categorical block grants
closed-ended matching grants
Document Type: 
Working Paper

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