Federalism, Horizontal Equity, and the Optimal Grant

Abstract

Federalism is often argued to produce a particular problem in designing hori-Abstract zontal equity policy that may be partially overcome by the use of intergovernmental grants. The nature of the federal equity problem is reconsidered; it is argued that only a specific subclass offederations suffer from an inherent equity problem and that in these cases, the use of grants is a necessary part of the problem rather than its solution. The specific choice ofgrant is reconsidered in the context of simple majority voting on local issues to illustrate a difficulty in the identification of the optimal grant.