Volume 29, Number 1 (Winter) 1994
Frank, Richard G., and Martin Gaynor. 1994. "Organizational Failure
and Transfers in the Public Sector: Evidence
from an Experiment in the Financing of Mental Health Care." Journal of
Human Resources 29(1):108-125.
Intergovernmental transfers are potentially important tools for aligning the goals of lower levels of government, which produce public services, with those of higher levels of government, which finance these services. This paper makes use of a unique "natural experiment" in the design of intergovernmental grants to estimate the reactions of local government providers to the incentives contained in transfers from state government. The State of Ohio has dramatically altered the method by which local public mental health care is financed. The manner in which the grant mechanism has been altered allows for the estimation of income compensated responses of local governmental entities. The empirical results indicate strong responses to the "new" incentives, suggesting a broad set of applications in public economics.
Richard Frank is a Professor of Health Policy and Management and Economics at Johns Hopkins University. Martin Gaynor is an Assistant Professor of Health Policy and Management and Economics at Johns Hopkins University. Both are research Associates of the National Bureau of Economic Research. This research was supported by grants from the national Institute of Mental Health (#MH45841, #MH44407) and the Robert Wood Foundation. We are grateful to Maureen Corcoran, Martha Knisley, and Rick Tulley for their assistance in understanding the Ohio mental health system. David Salkever offered us a great deal of helpful advice on this paper. We wish to thank Steve Craig, Paul Gertler, Gina Livermore, Jim Poterba, two referees and participants in the NBER Summer Institute meetings on health economics and in seminars at Case Western Reserve and Johns Hopkins Universities, for many useful comments on earlier versions of this paper. We also received helpful comments from several Mental Health Board staff members in the State of Ohio. Chuan Fa Guo and Frances Lynch provided expert research assistance. The usual caveat applies. The data used in this article can be obtained beginning in August 1994 through August 1997 from the authors at the following address: Department of Health Policy and Management, Johns Hopkins University, 624 North Broadway, Baltimore, MD 21205.
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