Journal Article

Formula Funding of Public Services: An Economic Analysis

Peter C. Smith

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 19, issue 2, pages 301-322
Published in print June 2003 | ISSN: 0266-903X
Published online June 2003 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/19.2.301
Formula Funding of Public Services: An Economic Analysis

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  • Economic Development and Growth
  • Public Economics
  • Political Economy
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This paper discusses the economic implications of distributing funds for devolved public services using mechanical formulae. The rationale for using such methods is that they will contribute to the increased efficiency and equity of public services. By acting as arbiters in complex bargaining situations, they also serve important political objectives. The principles of formula funding are examined from an economic perspective, using a production‐function approach. As well as yielding major benefits, formula funding has the potential for introducing perverse incentives and risk‐avoidance behaviour, particularly among smaller units such as schools and general practices. Strategies for avoiding adverse outcomes are discussed, and the broader political context within which formula funding operates is examined. The paper ends with an assessment of the priorities for future developments in formula funding.

Journal Article.  0 words. 

Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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