THE POLITICAL DETERMINATION OF INTERGOVERNMENTAL GRANTS IN AUSTRALIA

Intergovernmental grants have been conventionally explained on the bas is of either equity/efficiency and/or institutional considerations. Th is paper seeks to model Australian intergovernmental grants by includi ng both traditional public finance variables and public choice influen ces; that is, grants are used by federal government politicians to pur chase political capital, thereby enhancing their own chances of reelec tion. The models employed in this paper are tested for six Australian states for the period 1981-82 to 1991-92 using unsystematic grant tran sfers. The results provide support for these public choice considerati ons, and highlight the importance of incorporating institutional facto rs and controlling for misspecification in the error structure in esti mates of this type.