A politico-economic approach to intergovernmental : lump-sum grants

This paper develops a positive approach to grant design when the central government and a lobby of local governments are the main agents. It develops the hypothesis that the regressivity or progressivity of per capita grants regarding community size is, ceteris paribus, related to the structure of the lobbying activities of local governments and is independent of hypothetical economies or diseconomies of scale in the production of local public goods. An encompassing lobby organisation using a "one mayor one vote" system of representation supports the regressivity of per capita grants while under "proportional" representation the lobby will support a design of per capita grants which is progressive towards community size. An empirical analysis of lump-sum grants in Portugal supports the politico-economic hypothesis and rejects the hypothesis that economies of scale is the main explanatory cause for the observed regressivity of per capita grants.