Poverty Reduction Using Self-Interested Intermediaries: Implications for the Design of Inter-Governmental Transfers

The paper studies the design of inter-governmental transfers when redistribution is effected through the public provision of a private good (education) by local government agents. The central government does not necessarily have the same preferences as the local agents regarding the relative welfare of poor and non-poor individuals, but must rely on them to implement public spending decisions. This divergence of preferences induces an incentive role, which does not rely on the existence of externalities, for matching grants that take the form of two-part tariffs. Numerical simulations are used to investigate the dependence of the matching grant on the relationship between central and local preferences, local poverty rates, and the use of poverty maps.