Influence of intergovernmental grants on the economic behavior of subnational governments

Abstract

The aim of the article is to provide a brief analysis of the influence of intergovernmental transfers on subnational government behavior and provision of services. The article attempts to integrate both the theoretical and empirical insights through fiscal federalism literature and from empirical studies. The article examines the effects of two basic types of transfers on provision of public services by using the indifference curve analyses. The article also describes the basic principles of grant design, and analyses fiscal discipline in accordance to dependence on intergovernmental transfers.