Free-Riding and Intergovernmental Grants

Abstract

This paper argues that to associate intergovernmental grants with the objectives of equity and efficiency implies that governments are irrational. The authors find long-term systematic irrationality in the behavior of any institution difficult to accept. The authors, therefore, propose that the factors which determine expenditure concentration in governmental systems are different and independent of the factors that control revenue concentration, so that the two will, in general, be different. When expenditure concentration is smaller than revenue concentration, budgetary balance will require intergovernmental grants. The authors stress that the demand for grants originates with junior governments and that it creates a standard agency problem which can be remedied by making intergovernmental grants conditional. Copyright 1992 by WWZ and Helbing & Lichtenhahn Verlag AG