Central Grants to Local Governments: A Game Theoretic Approach

Abstract

The use of game theoretic concepts is applied to the theory of central grants to local governments, when the total amount of grants distributed by central government is constrained. It is shown that inefficiencies exist and that local governments spend too much on public services relative to the efficient level. This inefficiency is shown to disappear as the number of local governments increases. Relative to the situation where there is no central constraint on the total amount of grant available, it is demonstrated that a closed-ended grant results in less expenditure on local services.