Tax competition, spillovers, and subsidies

In the literature of local public finance, one of the well-known properties of optimal matching grant programs is that the matching grant rate should increase as the degree of benefit spillovers of public goods increases. This paper presents the reexamination of properties of optimal matching grant programs using the model of Bjorvatn and Schjelderup (Int Tax Public Financ 9:111–120, 2002). The result formally captures a property of matching grants that the optimal matching grant rate might decrease with the degree of spillover externalities.