Intergovernmental transfers and public sector expenditures : a game theoretic approach

Abstract

The purpose of this paper is to present a simple theoretical framework that captures this coordination problem and its implications in terms of public finances. The framework adopts a game-theoretic point of view to investigate the consequences of different modes of interaction between Federal and Provincial jurisdictions for the determination of the overall public sector expenditure and taxes. In this sense, the exercise offers another perspective through which the old question regarding the forces behind the observed growth of the public sector can be looked at1 . More specifically, the types of questions we deal with can be stated in the following way: Does the institutional framework which regulates the fiscal relationship among -different government jurisdictions matter in terms of the overall level of public sector expenditure and taxes? Do intergovernmental grants and decentralization of expenditure decisions imply inefficiencies in the provision of public goods, at both the central and provincial levels?