Inside The Gift Horse'S Mouth: City Spending, Political Instituions And The Community Development Block Grant Program

Since 1975, the Community Development Block Grant (CDBG) has transferred funds from the federal government to cities, with the goal of improving low- and moderate-income urban areas. Though this program is the U.S. federal government's single largest source of aid to cities, scholars and policymakers know relatively little about the program's effectiveness. Do cities treat these grants as an addition to total revenues? Or do they, as theory predicts, return most of the grant as a tax refund? Moreover, can political institutions cause cities to differ in the extent to which they use grant funds to supplement or supplant total revenues? We use the formula nature of the CDBG program to identify the effect of grant changes which are exogenous to city characteristics. Using budgetary, demographic, and grant allocation data on cities from 1975 to 2004, we find that, for each additional dollar of CDBG funds, cities collect an average of an additional dollar of revenue. Of this additional dollar, almost fifty cents go toward spending categories targeted by the program. Furthermore, we show that the tendency to use grant funds as a supplement to total revenues increases in the number of elected municipal officials, consistent with political economy theory that posits a common pool problem in the provision of local public goods.