A Study of Central Governmental Grants-in-Aid under Asymmetric Information

2001 Fiscal Year Final Research Report Summary

• Project/Area Number: 11630098
• Research Category: Grant-in-Aid for Scientific Research (C)
• Allocation Type: Single-year Grants
• Section: 一般
• Research Field: Public finance/Monetary economics
• Research Institution: NAGOYA GAKUIN UNIVERSITY (2000-2001); Hiroshima University (1999)
• Principal Investigator: MIZUTA Kenichi Nagoya Gakuin University, Economics, Professor, 経済学部, 教授 (00157497)
• Project Period (FY): 1999 – 2001
• Keywords: central governmental grant-in-aid / asymmetry of information / incentive compatibility / signaling game / intuitive criterion / flypaper effect / fungibilitv assumption

Research Abstract

I I considered a mechanism to induce local governments to provide the expenditure levels desirable for the central government by means of grants-in-aid under the case where the central government has only imperfect information about preferences of local governments. I ascertained that under the non-linear grants-in-aid system devised here the central government can minimize the grant expenditures to realize some levels of local public spending no less than some specified level α, keeping incentive compatibility for local governments.
II I applied a signaling game model to analyze the case, where there are two types of local governments (type h and type λ with respect to their efficiency of public service provision and, where only local governments have information about their belonging types of efficiency. From this analysis I made clear that there is only a unique equilibrium which satisfies the intuitive criterion, where the type I government opts the matching grant with 100 percent of matching rate, and the type h government opts the matching grant of sufficiently low level of matching rate that satisfies the incentive compatibility condition as an equality.
III I examined whether the flypaper effects exist and the fungibility assumption is satisfied significantly in respect city groups of population and financial affordability classes from the 1990 and 1999 data of total expenditures, welfare, and public investment expenditures in all cities nationwide. I got the results that there are significant positive or negative flypaper effects in the total expenditure and the adverse-fungibility in respective expenditure items in respective city gropes and there are the tendency of strengthening (weakening) of positive (negative) flypaper effects and adverse-fungibility effects from 1990 to 1999. Finally I showed the implication of the existence of these effects for the incentive compatible non-linear grants-in-aid system analyzed in I.