Special Interest Groups and the Allocation of Public Funds
AbstractA 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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Date of creation: Feb 2006
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Other versions of this item:
- Singhal, Monica, 2008. "Special interest groups and the allocation of public funds," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 548-564, April.
- Singhal, Monica, 2006. "Special Interest Groups and the Allocation of Public Funds," Working Paper Series rwp06-004, Harvard University, John F. Kennedy School of Government.
- H7 - Public Economics - - State and Local Government; Intergovernmental Relations
- D7 - Microeconomics - - Analysis of Collective Decision-Making
- H1 - Public Economics - - Structure and Scope of Government
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-02-26 (All new papers)
- NEP-PBE-2006-02-26 (Public Economics)
- NEP-POL-2006-02-26 (Positive Political Economics)
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