Vertical Grants and Local Public Efficiency

The existing empirical literature on the impact of vertical grants on local public-sector efficiency yields mixed results. Given the fact that vertical financial equalization systems often reduce differences in fiscal capacity, we argue that empirical studies based on cross-sectional data may yield a positive relationship between grants and efficiency of public service production even when the underlying causal effect is not. We provide a simple illustrative theoretical model to show the logic of our argument and illustrate its relevance by an empirical case study for the German state of Saxony-Anhalt. We show that our main argument of an inference-disturbing effect applies to those existing studies that are more optimistic about the impact of vertical grants. Finally, we argue that it may disturb the inference drawn from studies in a number of other countries where vertical grants—intended or not—concentrate in fiscally weak municipalities.

01. May 2019

Authors Ivo Bischoff Peter Bönisch Peter Haug Annette Illy

Whom to contact

For Researchers

Dr Peter Haug
Dr Peter Haug

If you have any further questions please contact me.

+49 345 7753-709 Request per E-Mail

For Journalists

Mitglied der Leibniz-Gemeinschaft LogoTotal-Equality-LogoWeltoffen Logo