Paper number: 97/03
Paper date: 17 November 1996
Paper Category: Discussion Paper
University of Exeter and CEPR**
This paper considers the problem facing a central government which can transfer resources between regional governments by use of intergovernmental grants. Regions provide a public good and are subject to privately observed shocks either to income, or demand for, or cost of, the public good. There may be public good spillovers between regions. In this set-up, central government has an insurance role, and possibly also a role as co-ordinator of regional public good provision. When grants are chosen to maximise regional expected utility, notatble results are; (i) depending on the source of the shock, the grant may induce over- or undersupply of the public good relative to the Samuelson rule; (ii) with asymmetric information, and with spollovers, there is a two way distortion of public good supply - that is, qualitatively different distortions (relative to the Samuelson rule) at different points in the support of the distribution of the shock; (iii) with symmetric information, the optimal grant is always linear in the public good, but with asymmetric information, the grant will have a quasi-concave or quasi-convex, rather than an constant slope, depending on the source of the shock.
First version: 13 March 1996
This version: 17 November 1996
JEL Classification Nos: H23, H70, H77
Keywords: Intergovernmental grants, public goods, asymmetric information
Corresponding Author: Ben Lockwood, Department of Economics, University of Exeter, Amory Building, Rennes Drive, Exeter, EX4 4RJ, Great Britain, tel:(44) 1392 263219, fax: (44) 1392 263242, email: B.Lockwood@exeter.ac.uk
* Early versions of this paper were presented at the Mini-Workshop on International Taxation, EPRU, Copenhagen, March 14-16, 1996, and the HCM Workshop, EPRU, may 3-4, 1996. I would like to thank conference participants, especially Massimo Bordignon, Sam Bucovetsky, Maurice Pestieau and Wolfgang Peterws for helpful comments.
** Mailing address: Department of Economics, University of Exeter, EX4 4RJ, UK, email: B.Lockwood@exeter.ac.uk