Productive effects of public spending, spillovers, and optimal matching grant rates

Abstract

This study uses the model in which a central government gives a subsidy to the jurisdictions, and analyzes the optimal matching grant rate for local public spending that has characteristics of both public goods and public inputs. If the expenditures are public inputs, they raise the productivity of the jurisdiction which provides them. Their spillover effects to other regions are assumed to influence consumption and/or production. Contrary to this approach, traditional analyses of matching grants for public spending have only focused on public goods and consumption spillover. By considering these factors, this study obtains some intriguing results. The productive effect of public inputs on the optimal matching grant rate depends on whether the degree of the production spillover is higher than that of the consumption spillover.