The political determination of intergovernmental grants in Australia

Intergovernmental grants have been conventionally explained on the basis of either equity/efficiency and/or institutional considerations. This paper seeks to model Australian intergovernmental grants by including both traditional public finance variables and public choice influences; that is, grants are used by federal government politicians to purchase political capital, thereby enhancing their own chances of reelection. The models employed in this paper are tested for six Australian states for the period 1981–82 to 1991–92 using unsystematic grant transfers. The results provide support for these public choice considerations, and highlight the importance of incorporating institutional factors and controlling for misspecification in the error structure in estimates of this type.