Cost-Sharing versus Block-Funding in a Federal System: A Demand Systems Approach.

This paper employs a maximizing framework, consistent with the axioms of consumer preference, to analyze local government's choice of spending on different social services. Within this framework, it is possible to include both block-funding and cost-sharing intergovernment transfer schemes. Canada's movement to block-funding from the cost-sharing method of financing provincial expenditures on hospitals, medical care, and post-secondary education is analyzed. The results indicate that the provincial governments' actions are generally consistent with a significant maximizing model of consumer behavior and that the change to block-funding had a significant impact on real provincial funding of some previously cost-shared social services.