Abstract
The provision of subsidized child care has grown to become a sizeable economic activity in Sweden during recent decades. This paper examines the changed financial relation between central and local governments and the impact of child-care grants on local government behaviour. We find that during an earlier regime, with a system of matching grants, local governments responded strongly to the incentives of the rules. This resulted in both intended and unintended outcomes, as well as a distortion of information to the central government. Experiences from a recent transition of regime towards a kind of closed block grant system, illustrates new types of adaptive behaviour but also the problem of finding a formula for a fair allocation of resources among local governments. When designing a block grant system a distinction must be made between expenditures and resource needs; cost expenditure data do not necessarily reflect resource needs in cases where there are national categorical equity goals related to social services of a merit-want character.