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Formula Funding of Public Services: An Economic Analysis

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  • Peter C. Smith

Abstract

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. Copyright 2003, Oxford University Press.

Suggested Citation

  • Peter C. Smith, 2003. "Formula Funding of Public Services: An Economic Analysis," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 19(2), pages 301-322, Summer.
    • Handle: RePEc:oup:oxford:v:19:y:2003:i:2:p:301-322
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    Cited by:

    1. Schang, Laura & Hynninen, Yrjänä & Morton, Alec & Salo, Ahti, 2016. "Developing robust composite measures of healthcare quality – Ranking intervals and dominance relations for Scottish Health Boards," Social Science & Medicine, Elsevier, vol. 162(C), pages 59-67.
    2. Mihály Fazekas, 2012. "School Funding Formulas: Review of Main Characteristics and Impacts," OECD Education Working Papers 74, OECD Publishing.
    3. Guccio, Calogero & Mazza, Isidoro, 2014. "On the political determinants of the allocation of funds to heritage authorities," European Journal of Political Economy, Elsevier, vol. 34(C), pages 18-38.
    4. Tuukka Holster & Shaoxiong Ji & Pekka Marttinen, 2024. "Risk adjustment for regional healthcare funding allocations with ensemble methods: an empirical study and interpretation," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 25(7), pages 1117-1131, September.
    5. Somi Shin, 2021. "Healthcare provider response to payment system reform: evidence from New Zealand," SN Business & Economics, Springer, vol. 1(11), pages 1-29, November.
    6. Adam Oliver, 2005. "The English National Health Service: 1979‐2005," Health Economics, John Wiley & Sons, Ltd., vol. 14(S1), pages 75-99, September.
    7. Nagy, Balázs, 2010. "Egy hiányzó láncszem?. Forráselosztás a magyar egészségügyben [Resource allocation in Hungarian health care - is there a missing link?]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(4), pages 337-353.
    8. Peter Friedrich & Joanna Gwiazda & Chang Woon Nam, 2003. "Development of Local Public Finance in Europe," CESifo Working Paper Series 1107, CESifo.
    9. James Gallagher & Daniel Hinze, "undated". "Financing Options for Devolved Government in the UK," Working Papers 2005_24, Business School - Economics, University of Glasgow.
    10. Rob Ball & David King & David Eiser, 2012. "Assessing the Relative Health Care Spending Needs of the UK's Devolved Territories: A Scottish Perspective," Environment and Planning C, , vol. 30(2), pages 322-346, April.
    11. Gloria Agyemang, 2010. "Accounting for needs? Formula funding in the UK schools sector," Accounting, Auditing & Accountability Journal, Emerald Group Publishing, vol. 23(1), pages 82-110, January.

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