Abstract
The impact of intergovernmental grants on the expenditures of recipients has been the focus of considerable investigation, while their impact on the relative sizes of the public and private sectors has been given little more than brief discussion. No well-defined structure has emerged to explain how a system of intergovernmental grants might affect public sector size. This article is a first attempt at such a structure. It investigates the impact of intergovernmental grants by comparing public sector size in the presence of conditional lump-sum grants to public sector size in their absence for given grantor and recipient preferences on the allocation of financial resources between the private and public sectors. Implications are drawn from the model and comments are made pertaining to the empirical investigations of grant effects on recipient governments spending.
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