Intergovernmental Grants: A Formal Model of Interrelated National and Subnational Political Decisions

Intergovernmental grants are based on the interrelated choices of: (i) the national government deciding whether to offer the grant; (ii) the national government determining grant conditions; (iii) the subnational government deciding whether to accept the grant; and (iv) the subnational government determining policy, including spending levels, upon grant receipt. Empirically and theoretically, scholars often study these decisions separately, leading to an incomplete understanding of grant-related behavior. This article develops a noncooperative game theoretic model that simultaneously captures all four of these decisions. This approach helps to better explain puzzles surrounding intergovernmental grants, including the ‘flypaper effect,’ asymmetric responses of recipient governments to grant increases and decreases, the grant-acceptance decisions of subnational governments, and tradeoffs between the size of grants and the strings that are attached.