Organizational Failure and Government Transfers: Evidence From an Experiment in the Financing of Mental Health Care

This paper makes use of a unique "natural experiment" in the design of intergovernmental grants. 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 subsidy responses of local governmental entities. The empirical results indicate strong responses to the "new" incentives suggesting a direction for policy makers for dealing with some of the most vexing problems in mental health policy.