An analysis of financial incentives in the performance contract of Montana.

In an effort to contain costs and provide appropriate services, a growing number of states are experimenting with the terms of their fiscal transfers to localities. This paper contains an analysis of the economic incentives present in one such effort, the performance contract of the state of Montana. This contract contains incentives which do not fully support the attainment of a number of possible social goals, but these incentives could be strengthened by some simple amendments to the existing structure.