Public Finance, 2nd Edition

EdG

O

H

D

E

45

o

F

C

All other

K

J

P

1

P

2

FIGURE 31.11

legislature that they were forced to accept the lower matching rate, but they

do not mention the fungible portion. Therefore, they are pretending that the

with-grant budget line is DJ, beginning from D but with the same slope

(matching rate) as the true budget line beginning from H. A grant of FC on

the true with-grant budget line is equal to a grant of P

1

P

2

on the pretend with-

grant budget line DJ. The bureaucrats tell the legislature that they are at

point P

2

and require an amount KP

1

from the legislature to fund the recipient

government's portion of the project. In fact, they only require EF from the

legislature because they are really operating at C. Thus, they are able to

pocket both the fungible portion of the grant plus the excess funds received

from the government in the amount (KP

1

 EF). Whether the bureaucrat's

information concerning public projects is really so private that they could get

away with such schemes is doubtful, of course. But the story is indicative of

the general point that private information is likely to provide local bureau-

crats with incentives to negotiate with federal administrators on grant par-

ameters.

REFERENCES

Aktinson, A., and Stiglitz, J., Lectures on Public Economics, McGraw-Hill, New York, 1980,

chap. 17.

Bergstrom, T., Rubinfeld, D., and Shaprio, P., ``Micro-Based Estimates of Demand Functions

for Local School Expenditures,'' Econometrica, September 1982.

Bradbury, K., Ladd, H., Perrault, M., Reschovsky, A., and Yinger, J., ``State Aid to OVset Fiscal

Disparities Across Communities,'' National Tax Journal, June 1984.

928 REFERENCES

Chernick, H., ``Price Discrimination and Federal Project Grants,'' Public Finance Quarterly,

October 1981.

Feldstein, M., ``Wealth Neutrality and Local Choice in Public Education,'' American Economic

Review, March 1975.

Fisher, R., ``Income and Grant EVects on Local Expenditures: The Flypaper EVect and Other

DiYculties,'' Journal of Urban Economics, November 1982.

Goldstein, G., and Pauly, M., ``Tiebout Bias on the Demand for Local Public Goods,'' Journal of

Public Economics, Vol. 16, 1981, pp. 131±144.

Holsley, C., ``Price and Income Distortions Under Separate Spending and Taxing Decisions,''

Journal of Public Economics, January 1993.

LeGrand, J., ``Fiscal Equity and Central Government Grants to Local Authorities,'' Economic

Journal, September 1975.

McGuire, M., ``An Econometric Model of Federal Grants and Local Fiscal Response,'' in

R. Inman et al., Eds., Financing the New Fiscal Federalism Johns Hopkins University

Press for Resources for the Future, Inc., Baltimore, MD, 1975, chap. 5.

McGuire, M., ``The Analysis of Federal Grants into Price and Income Components,'' in

P. Mieszkowski and W. Oakland, Eds., Fiscal Federalism and Grants in Aid, Urban Insti-

tute, Washington, D.C., 1979, chap. 4.

Oates, W., Fiscal Federalism, Harcourt Brace Jovanovich, New York, 1972.

Oates, W., ``On the Measurement of Congestion in the Provision of Local Public Goods,''

Journal of Urban Economics, July 1988.

Rubinfeld, D., Shapiro, P., and Roberts, J., ``Tiebout Bias and the Demand for Local Public

Schooling,'' Review of Economics and Statistics, August, 1987.

Serrano v. Priest, L.A. 29820, Superior Court No. 938254.

31. THE ROLE OF GRANTS-IN-AID IN A FEDERALIST SYSTEM OF GOVERNMENTS 929

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