Buettner, ThiessThiessBuettnerSchwager, RobertRobertSchwagerHauptmeier, SebastianSebastianHauptmeier2018-11-072018-11-072011https://resolver.sub.uni-goettingen.de/purl?gro-2/21398This paper explores conditions under which revenue-sharing grants will achieve efficiency. We develop a general formulation of the state's decision problem of implementing a set of local policies. A theoretical analysis shows that if the state government pursues own policies and cannot levy lump-sum contributions from local jurisdictions, it will implement revenue-sharing grants that induce local governments to raise local tax rates. A subsequent empirical analysis of local tax policy in Germany suggests that attempts by state-level governments to extract fiscal resources from local governments result in higher tax rates at the local level. (JEL: H71, H77)journal_article000298571000006