Knowledge that Transforms

Until quite recently, theoretical analyses of the impact of intergovernmental grants on public expenditures have run either implicitly or explicitly in terms of the familiar theory of indiv-idual choice.' The recipient of the grant is typically viewed in effect as an individual decision maker with preference patterns of the usual sort defined over private and public goods. Within this theoretical structure, a number of propositions have been developed including, for example, the conclusion that, dollar-for-dollar, a matching grant will induce a greater expansion in spending on the public good than will a lump-sum, unconditional grant. The difficulty with this analysis, as we all have been well aware, is that this is not the appropriate theoretical framework for the study of intergovernmental grants. Such grants are not grants to individuals; they are grants to groups of people. This means that the effects of these grants depend upon the process by which the group makes collective decisionis. A real theory of intergovernmental grants must, for this reason, be one which takes explicitly into account the political process through which the collectivity determines its levels of spending upon public goods. In one recent paper, Goetz and McKnew have shown for a special case that it is con-ceivable that lump-sum grants can have a greater stimulative impact on public spending than an equal-dollar matching grant. Using a rather complicated model in which the collectivity decides separately on the aggregate level of public spending and on the mix of public programs, they show that, if individual preferences bear a particular kind of relation to one another, simple majority voting will lead to greater public expenditure in response to a lump-sum grant than to a matching grant of the same amount. Whether this special case is likely to occur with any frequency is another matter, but, at any rate, it is clear that one can concoct particular instances in which a process of collective decision making will lead to results which are at variance with the conclusions which follow from the rnodel of individual choice. Our purpose in this paper is to try to explore somewhat more systematically the effects of these two types of intergovernmental grants. The question arises whether there are interesting classes of collective decision processes for which the comparative effects of the two types of intergovernmental grants can be predicted. In an earlier paper on revenue-sharing (Bradford and Oates), we have constructed a framework for conceptualizing collective budget determination which offers the possibility of dealing systematically with the effects of * The authors are grateful for a number of helpful comnments to the participants in economics seminars at McMaster University and at Rutgers University. In addition, they are indebted to the F'ord Foundation whose support has greatly facilitated this study. 1 For an excellent presentation using this approach, see James Wilde.

completely from the question of why households decide to live within a particular jurisdiction. Although we have no satisfactory thleory of urban local government, economists have not been reluctant to propose reforms in existing institutions. Advocates of metropolitan government suggest that decisions must be made at the metropolitan level if externalities are to be internalized and economies of scale realized. Tn contrast, the proponents of decentralization argue that further political fragmentation is required in order to provide greater variety in local public services. The only consensus, if any exists at all, is that present institutions of local government are inefficient. However, nowhere in the literature do we find an explanation of why, in view of this inefficiency, change is so rare. Annexations to the cen-tral city, relatively common at the turn of the century, ceased rather abruptly in most metropolitan areas after 1918. Subdivision of the larger political jurisdictions in our metropolitan areas does not appear at all likely. Thus, it seeins reasonab)le to ask of an adequate theory of metropolitan political economy an answer to the question: why are existing jurisdictional bourndaries so impervious to change? To answer this question we must investigate the impact of local governmental structure not only on allocative efficiency but on the extent of redistribution from rich to poor as well. In a recent study of suburbs in the Philadelphia metropolitan area, Williams, et al. [5] report that, when heavy expenditures were involved, wealthy communities were unwilling to enter into cooperative agreements with less wealthy communities. Only when their wealth was about the same would cities agree to engage in a jointly financed program. Across the United States, proposals for nietro-

Recent attention to education in the United States represents the merger of concern about efficiency of the educational system and concern about the distribution of educational services, particularly along racial and ethnic lines. However, there is very little guidance on how to satisfy any efficiency or distributional goals through public policy because extremely little is known about the relationship between inputs-particularly inputs available for public policy--and outputs of the educational process. Educational research has been slow in providing definitive answers to public policy questions for several understandable reasons: the subject of the educational process is extremely complex, especially as regards the physiological and psychological aspects; any theoretical development of a learning theory amenable to analysis for policy purposes is absent; and the required data traditionally have not been collected. Previous analyses have yielded some suggestive beginnings, and have provided insights into how the analysis should proceed. This analysis represents a next step of statistical inquiry into the educational process from a public policy point of view. Three fundamental educational policy questions are addressed: (1) do teachers count? (2) are schools operated efficiently now? (3) what characteristics of teachers and classrooms are important? Past studies have given ambiguous answers to these questions, largely due to inadequate data. Specifically, no data set which supplies accurate historical information on educational inputs at an individual level has been available. This study attempts to provide more conclusive answers by remedying the most glaring data problems for a set of students (third graders) in one school district.

Economics today rides the crest of intellectual respectability and popular acclaim. The serious attention with which our pronouncements are received by the general public, hard-bitten politicians, and even skeptical businessmen is second only to that which was given to physicists and space experts a few years ago when the round trip to the moon seemed to be our only truly national goal. The flow of learned articles, monographs, and text-books is swelling like a tidal wave; Eco-nometrica, the leading journal in the field of mathematical economics, has just stepped up its publication schedule from

Lecture to the memory of Alfred Nobel, December 11, 1971

Publisher Summary This chapter discusses the private and social value of information along with the reward of inventive activity. The individual is always fully acquainted with the supply–demand offers of all potential traders, and an equilibrium integrating all individuals' supply-demand offers is attained instantaneously. Individuals are unsure only about the size of their own commodity endowments and/or about the returns attainable from their own productive investments. They are subject to technological uncertainty rather than market uncertainty. The main reason is that information, viewed as a product, is only imperfectly appropriable by its discoverer. The standard literature on the economics of research and invention argues that there tends to be private underinvestment in inventive activity mainly because of the imperfect appropriability of knowledge. The contention made is that even with a patent system, the inventor can only hope to capture some fraction of the technological benefits because of his discovery. Even though practical considerations limit the effective scale and consequent impact of speculation and/or resale, the gains thus achievable eliminate any a priori anticipation of underinvestment in the generation of new technological knowledge.