Optimal Design of Intergovernmental Grants under Asymmetric Information
CESifo, Munich, 2003
CESifo Working Paper No. 919
![](https://cesifo.org/DocImg/cesifo_wp919.jpg?c=1689237014)
This paper develops a theoretical explanation why it may be optimal for higher-level governments to pay categorical block grants or closed-ended matching grants to local governments. We consider a federation with two types of local governments which differ in the cost of providing public goods. The federal government redistributes between jurisdictions, but cannot observe the type of a jurisdiction. In this asymmetric information setting it is shown that the second-best optimum can be decentralized with the help of categorical block grants and closed-ended matching grants, but not with unconditional block grants or open-ended matching grants.