Distortions in a Multi-Level Co-Financing System: The Case of the Agri-Environmental Program of Saxony-Anhalt

In this paper we analyze the impact of the EU multi-level co-financing system on regional policy-making and priority setting taking the case of the agri-environmental program of Saxony-Anhalt in Germany. The implications of several co-financing scenarios are analyzed and compared to respective lump-sum transfers using an interactive linear programming approach. The results reveal that regional choices on agri-environmental measures are strongly influenced by the co-financing system leading to distortions. The extent of these distortions depends on the specific regional preferences and restrictions to be considered in the policy-making process