Competing for Aid
Economists have known for a very long time that most social states have more than one equilibrium. In particular, there is the agreement equilibrium that corresponds to some point on the Pareto optimal frontier, and that represents cooperation among the members of the society. There is a second, well-known equilibrium—the independent adjustment equilibrium—which occurs when, for one reason or another, agreement is not possible. The independent adjustment equilibrium is normally less satisfactory to the parties than the cooperative equilibrium. Ideally, the role of the state is to affect this independent adjustment equilibrium in ways that lead to superior outcomes. Economists, although occasionally dealing with the independent adjustment equilibrium, have normally confined their research to the cooperative equilibrium.
KeywordsLocal Government Central Government Federal Government Town Council Cooperative Equilibrium
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- 1.Note that I ignore compounding on both sides of the equation. In the real world, a decision for three years would presumably have to take a compounding effect into account, and hence would be more complicated.Google Scholar
- 2.In special circumstances, this is not entirely true. The Town of Blacksburg is expanding and quite deliberately taking in the university campus on the grounds that a certain amount is paid to local governments on a per-head basis by the Commonwealth of Virginia, while the students in fact consume relatively little in the way of government services. The county government, which may lose this asset, is naturally angry.Google Scholar
- 3.It is possible for the value of the grant to be higher for the federal government or for the rest of the nation, even though it is lower from the standpoint of the local government. This point will be discussed further below.Google Scholar