Intergovernmental Grants: A Formal Model of Interrelated National and Subnational Political Decisions

Abstract

Intergovernmental grants are based on the interrelated choices of: (i) the national government deciding whether to offer the grant; (ii) the national government determining grant conditions; (iii) the subnational government deciding whether to accept the grant; and (iv) the subnational government determining policy, including spending levels, upon grant receipt. Empirically and theoretically, scholars often study these decisions separately, leading to an incomplete understanding of grant-related behavior. This article develops a noncooperative game theoretic model that simultaneously captures all four of these decisions. This approach helps to better explain puzzles surrounding intergovernmental grants, including the 'flypaper effect, ' asymmetric responses of recipient governments to grant increases and decreases, the grant-acceptance decisions of subnational governments, and tradeoffs between the size of grants and the strings that are attached.

The stimulative effects of intergovernmental grants and the marginal cost of public funds

“…Hamilton (1986) was the first to point out that a flypaper effect can arise when a subnational governments uses distortionary taxes to finance at least part of their expenditures. Becker and Mulligan (2003) and Volden (2007) have developed political economy models that exhibit a flypaper effect because recipient governments rely on distortionary taxes to finance part of their spending. 2 Dahlby (2011) has derived a model of the magnitude of the flypaper effect when a benevolent government finances part of its expenditures using a distortionary tax.…”

Making Industry Part of the Climate Solution

“…Federal funds might be saved by allowing states greater flexibility in designing EERS programs, as governors have shown a willingness to accept less grant funding for fewer restrictions (Volden, 2007). The cost structure of a federal mandated program could be based on customary practices in the states that are leading in EPS programs.…”

Why not fully spend a conditional block grant?

“…Another related question is whether subnational governments apply and lobby for grants. See, for example, Chernick (1979), Stein (1979Stein ( , 1981, Foster (1981), Rich (1989), Schneider and Ji (1990), Knight (2002), Bickers and Stein (2004), Volden (2007), Craw (2010), and Doan and McFarlane (2012). In our setting, however, policy goals of the national and subnational government do not fundamentally differ and the subnational government automatically receives the grant.…”