Need Equalization Transfers and Productive Efficiency of Local Governments

The paper deals with Need equalization formula for intergovernmental grants, and analyses, by a simple model, the impact of parameters changes on productive efficiency of a local government. By this kind of efficiency we mean producing and providing, at minimum cost and at high quality, a output level of a public service at least equal to a standard, fixed by the central government for pursuing horizontal equity among jurisdictions. In some German Landers the municipal transfers system is broadly inspired by such a criterion, and the recent reform of Italian equalization grants system moves in this direction