A politico-economic approach to intergovernmental Lump-sum Grants

This paper develops a positive approach to grant design as the result of an implicit or explicit bargaining process between central and local governments. It is shown that when per capita grants decrease with community size, central government can either (i) enlarge the majority of (small size) communities that support this sort of grant design when the total amount of grants is given or (ii) diminish the total amount of grants when those received by the median-rank size jurisdiction are constant. Both considerations show that it is politically feasible to have a grants scheme where urban communities are in a relatively worst situation than medium size and small communities. An empirical analysis of lump-sum grants in Portugal supports the politico-economic hypothesis and rejects the hypothesis that per capita grants are designed according to the fiscal equalization normative criterion. ; info:eu-repo/semantics/publishedVersion