Association for Public Policy Analysis & Management

In this paper, we investigate how intergovernmental grants can stimulate local government’s continuing innovation in the energy sector. We examine this broad research question in the context of the Energy Efficiency and Conservation Block Grants (EECBG)’s implementation. The EECBG program is a major component of the energy package in the American Recovery and Reinvestment Act (ARRA) and has been the only large-scale one-time grants from the federal government to local governments to stimulate innovation in the energy sector. Thus, it provides an ideal testing ground for exploring the roles of intergovernmental grants in incentivizing local government innovation even after the grant period is complete.

Based on principal agent theory and policy learning theory, we propose an “informed principals-learning agents” framework to explain how intergovernmental grants is used by the federal government (principal) to shape local government (agent)’s preferences and influence their choices to invest in clean energy beyond the lifespan of the grants. Using survey data and government administrative data on EECBG implementation, we find that positive performance measurement results on EECBBG related goals are associated with a local government’s continuation of the clean energy program after the grant period, particularly when performance information is used in the local government’s budgeting process.

This paper contributes to the studies on intergovernmental grants by integrating principal-agent theory and policy learning to explain how principals can influence long-term preferences of the agents and direct their behaviors. Findings of this paper can inform future design of intergovernmental grants. Preliminary results suggest that performance reporting requirements in intergovernmental grants serve as learning device and reinforce local government’s innovative behaviors.