ABSTRACT
Intergovernmental Grants (IGR) are distributed to lower-level governments from higher-level ones to account for spill over benefits or costs of delivering public services by the lower-level governments. The main reason for IGR grants is to internalize spill over benefits or costs. There are three types of IGR grants: matching, categorical and general grants. IGR grants are characterized by four main factors: use for a service or general purpose, automatic allocation based on formula or application for project, matching requirement by recipient governments. The first criterion of assigning governmental services is the principle of subsidiarity. The traditional theory of fiscal federalism which is based on the principles of correspondence and subsidiarity is often dubbed first-generation fiscal federalism (FGFF). Second-generation fiscal federalism (SGFF) builds on FGFF but assumes that sub national officials have different goals induced by political and fiscal institutions. The principle of subsidiarity leads to devolution, a trend that is a reflection of political evolution towards democratic and participatory governments.
