Efficient Centralized Earmarking Under Decentralized Fiscal Commitments

Abstract

Earmarked federal grants are ubiquitous and significant. Traditional fiscal federalism is unable to explain the widespread utilization of such grants. Recent arguments focusing on the potential benefits of centralized earmarking in reducing incentives for the creation of soft budgets at sub-central government levels merit formalization. This is the main motivation for the paper. The fruits of the analysis provide a clear normative prescription: the central government should earmark its grants in order to redistribute private consumption and public expenditures incurred in the provision of all public goods that are prone to be determined strategically under decentralized fiscal commitments.