ORGANIZATIONAL FAILURE AND TRANSFERS IN THE PUBLIC-SECTOR - EVIDENCE FROM AN EXPERIMENT IN THE FINANCING OF MENTAL-HEALTH-CARE

Intergovernmental transfers are potentially important tools for aligning the goals of lower levels of government, which produce public services, with those of higher levels of government, which finance these services. This paper makes use of a unique ''natural experiment'' in the design of intergovernmental grants to estimate the reactions of local government providers to the incentives contained in transfers from state government. The State of Ohio has dramatically altered the method by which local public mental health care is financed. The manner in which the grant mechanism has been altered allows for the estimation of income compensated responses of local governmental entities. The empirical results indicate strong responses to the ''new'' incentives, suggesting a broad set of applications in public economics.