Grants structure when the type of public project is endogenous

Abstract

This paper gives an insight into changes in intergovernmental grants structure, focusing on the type of public project. Presenting a simple model which incorporates the endogenous determination of project type and grants structure, the results show that as the relative cost encountered by central government in collecting public funds increases, the central government tends to choose types of projects which local governments prefer and adopt block grant systems. The resulting equilibrium is compared with an optimal solution based on an utilitarian welfare function.