Welfare Financing: Grant Allocation and Efficiency

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Abstract

Welfare is often administered locally, but financed through grants from the central government. This raises the question how the central government can prevent local governments from spending more than necessary. We analyze block grants used in The Netherlands, which depend on exogenous spending need determinants and are estimated from previous period welfare spending. We show that, although these grants give rise to perverse incentives by reducing the marginal costs of welfare spending, they are likely to be more efficient than a matching grant, and more equitable than a fixed block grant.

Original languageEnglish
Pages (from-to)147-166
Number of pages20
JournalEconomist-Netherlands
Volume162
Issue number2
DOIs
Publication statusPublished - Jun-2014

Keywords

  • Block grant
  • Efficiency
  • Equity
  • Grant allocation
  • Welfare financing
  • INTERREGIONAL TRANSFERS
  • ASYMMETRIC INFORMATION
  • FISCAL DISPARITIES
  • FEDERAL-GRANTS
  • EQUALIZATION
  • COMPETITION
  • GENEROSITY
  • EQUITY

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