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Special Interest Groups and the Allocation of Public Funds

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  • Singhal, Monica

    (Harvard U)

Abstract

A long-standing puzzle in the fiscal federalism literature is the empirical non-equivalence in government spending from grants and other income. I propose a fully rational model in which violations of fungibility arise from dynamic interactions between politicians and interest groups with the ability to raise funds for local government. The predictions of the model are tested by exploiting unique features of windfalls received by states under a settlement with the tobacco industry. Although windfalls are unrestricted, the median state increased spending on tobacco control programs from zero to $2.30 per capita upon receipt of funds. The marginal propensity to spend on such programs is 0.20 from settlement revenue and zero from overall income. States which were not involved in the settlement lawsuits spend less. The findings are consistent with the predictions of the model when political partisanship is introduced: Republican governors spend less and factors which should lead to political convergence increase spending for Republicans and decrease spending for Democrats. These results cannot be explained by existing models in the literature.

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Bibliographic Info

Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp06-004.

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Date of creation: Feb 2006
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Handle: RePEc:ecl:harjfk:rwp06-004

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Citations

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Cited by:
  1. Gerald Carlino & Robert P. Inman, 2013. "Macro Fiscal Policy in Economic Unions: States as Agents," NBER Working Papers 19559, National Bureau of Economic Research, Inc.
  2. Sylvain Leduc & Daniel Wilson, 2013. "Are state governments roadblocks to federal stimulus? Evidence from highway grants in the 2009 Recovery Act," Working Paper Series, Federal Reserve Bank of San Francisco 2013-16, Federal Reserve Bank of San Francisco.
  3. Byron F. Lutz, 2006. "Taxation with representation: intergovernmental grants in a plebiscite democracy," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2006-06, Board of Governors of the Federal Reserve System (U.S.).
  4. Sylvain Leduc & Daniel Wilson, 2013. "Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 89 - 142.
  5. Robert P. Inman, 2008. "The Flypaper Effect," NBER Working Papers 14579, National Bureau of Economic Research, Inc.
  6. Gary D. Libecap & Terry L. Anderson, 2009. "The Allocation and Dissipation of Resource Rents: Implications for Fishery Reform," ICER Working Papers, ICER - International Centre for Economic Research 13-2009, ICER - International Centre for Economic Research.
  7. Russell Sobel & George Crowley, 2014. "Do intergovernmental grants create ratchets in state and local taxes?," Public Choice, Springer, Springer, vol. 158(1), pages 167-187, January.
  8. Fernando Aragon, 2012. "Local Spending, Transfers and Costly Tax Collection," Discussion Papers dp12-09, Department of Economics, Simon Fraser University.
  9. Leah Brooks & Justin Phillips & Maxim Sinitsyn, 2011. "The Cabals of a Few or the Confusion of a Multitude: The Institutional Trade-Off between Representation and Governance," American Economic Journal: Economic Policy, American Economic Association, American Economic Association, vol. 3(1), pages 1-24, February.
  10. Gary D. Libecap, 2013. "Addressing Global Environmental Externalities: Transaction Costs Considerations," NBER Working Papers 19501, National Bureau of Economic Research, Inc.
  11. Baskaran, Thushyanthan, 2014. "Bailouts and austerity," Center for European, Governance and Economic Development Research Discussion Papers 212, University of Goettingen, Department of Economics.
  12. Ionita Predescu Lorena & Radu Florin & Tabirca Alina Iuliana, 2011. "Needs Of Local Sustainable Development," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 91-97, December.
  13. Gary D. Libecap, 2014. "Addressing Global Environmental Externalities: Transaction Costs Considerations," Journal of Economic Literature, American Economic Association, vol. 52(2), pages 424-79, June.
  14. Riemer Faber & Pierre Koning, 2012. "Why Not Fully Spend a Conditional Block Grant?," CPB Discussion Paper 213, CPB Netherlands Bureau for Economic Policy Analysis.
  15. Chiara Del Bo & Massimo Florio & Silvia Vignetti & Emanuela Sirtori, 2011. "Additionality and regional development: are EU Structural Funds complements or substitutes of national Public Finance?," Working Papers, Centre for Industrial Studies (CSIL) 201101, Centre for Industrial Studies (CSIL).

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