Asymmetric Policy Interaction among Subnational Governments: Do States Play Welfare Games?

This paper explores the possibility that states respond asymmetrically to increases versus decreases in their neighboring states’ welfare benefit levels. We present a theoretical model suggesting that states respond more to decreases than to increases in their neighbors’ benefit levels. To test this proposition empirically, we use a panel of annual state-level data from 1983 to 1994 for each of the contiguous United States and the District of Columbia, and we observe changes in state demographic and economic characteristics as well as changes in state welfare benefits. We find substantial empirical evidence that uniformly supports our argument. State responses to neighbor benefit decreases tend to be at least twice as large as their responses to neighbor benefit increases. Our empirical results are robust to modeling neighbor benefits as endogenous. Our results, therefore, have substantial implications for public policy in the wake of the increased decentralization of welfare policy associated with the welfare reforms of 1996.