Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program
Contrary to simple theoretical predictions, existing evidence suggests that federal grants do not crowd out state government spending. A legislative bargaining model with endogenous grants documents a positive correlation between grant receipts and preferences for public goods; this correlation has likely biased existing work against measuring crowd-out. To correct for such endogeneity, the model motivates instruments based on the political power of state congressional delegations. Exploiting this exogenous variation in grants, the instrumental variables estimator reports crowd-out that is statistically and economically significant. This endogeneity may explain the flypaper effect, a nonequivalence between grant receipts and private income. (JEL D70, H40, H77)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 92 (2002)
Issue (Month): 1 (March)
|Contact details of provider:|| Web page: https://www.aeaweb.org/aer/|
More information through EDIRC
|Order Information:||Web: https://www.aeaweb.org/subscribe.html|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cornwell, Christopher & Schmidt, Peter & Wyhowski, Donald, 1992. "Simultaneous equations and panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 151-181.
- Timothy Besley & Stephen Coate, 1999.
"Centralized versus Decentralized Provision of Local Public Goods: A Political Economy Analysis,"
NBER Working Papers
7084, National Bureau of Economic Research, Inc.
- Besley, Timothy J. & Coate, Stephen, 2000. "Centralized versus Decentralized Provision of Local Public Goods: a Political Economy Analysis," CEPR Discussion Papers 2495, C.E.P.R. Discussion Papers.
- Alvarez, R Michael & Saving, Jason L, 1997.
"Congressional Committees and the Political Economy of Federal Outlays,"
Springer, vol. 92(1-2), pages 55-73, July.
- Alvarez, Michael R. & Saving, Jason, 1995. "Congressional Committees and the Political Economy of Federal Outlays," Working Papers 898, California Institute of Technology, Division of the Humanities and Social Sciences.
- Douglas Staiger & James H. Stock, 1994.
"Instrumental Variables Regression with Weak Instruments,"
NBER Technical Working Papers
0151, National Bureau of Economic Research, Inc.
- Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
- Chari, V V & Jones, Larry E & Marimon, Ramon, 1997.
"The Economics of Split-Ticket Voting in Representative Democracies,"
American Economic Review,
American Economic Association, vol. 87(5), pages 957-76, December.
- V. V. Chari & Larry E. Jones & Ramon Marimon, 1997. "The economics of split-ticket voting in representative democracies," Working Papers 582, Federal Reserve Bank of Minneapolis.
- Baron, David P & Ferejohn, John, 1987. "Bargaining and Agenda Formation in Legislatures," American Economic Review, American Economic Association, vol. 77(2), pages 303-09, May.
- Nechyba, Thomas J, 1997.
"Local Property and State Income Taxes: The Role of Interjurisdictional Competition and Collusion,"
Journal of Political Economy,
University of Chicago Press, vol. 105(2), pages 351-84, April.
- Thomas J. Nechyba, 1996. "Local Property and State Income Taxes: The Role of Interjurisdictional Competition and Collusion," NBER Working Papers 5419, National Bureau of Economic Research, Inc.
- Edward M. Gramlich & Harvy Galper, 1973. "State and Local Fiscal Behavior and Federal Grant Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 15-66.
- David F. Bradford & Wallace E. Oates, 1971. "The Analysis of Revenue Sharing in a New Approach to Collective Fiscal Decisions," The Quarterly Journal of Economics, Oxford University Press, vol. 85(3), pages 416-439.
- Hausman, Jerry A., 1983. "Specification and estimation of simultaneous equation models," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 7, pages 391-448 Elsevier.
- James R. Hines & Richard H. Thaler, 1995. "The Flypaper Effect," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 217-226, Fall.
- Moffitt, Robert A., 1984. "The effects of grants-in-aid on state and local expenditures : The case of AFDC," Journal of Public Economics, Elsevier, vol. 23(3), pages 279-305, April.
- Becker, Elizabeth, 1996. "The Illusion of Fiscal Illusion: Unsticking the Flypaper Effect," Public Choice, Springer, vol. 86(1-2), pages 85-102, January.
- Besley, Timothy & Case, Anne, 2000.
"Unnatural Experiments? Estimating the Incidence of Endogenous Policies,"
Royal Economic Society, vol. 110(467), pages F672-94, November.
- Timothy Besley & Anne Case, 1994. "Unnatural Experiments? Estimating the Incidence of Endogenous Policies," NBER Working Papers 4956, National Bureau of Economic Research, Inc.
- Hamilton, Bruce W., 1983. "The flypaper effect and other anomalies," Journal of Public Economics, Elsevier, vol. 22(3), pages 347-361, December.
- Filimon, Radu & Romer, Thomas & Rosenthal, Howard, 1982. "Asymmetric information and agenda control : The bases of monopoly power in public spending," Journal of Public Economics, Elsevier, vol. 17(1), pages 51-70, February.
- William T. Bogart & David F. Bradford & Michael G. Williams, 1992. "Incidence and Allocation Effects of a State Fiscal Policy Shift: The Florio Initiatives in New Jersey," NBER Working Papers 4177, National Bureau of Economic Research, Inc.
- Weingast, Barry R & Marshall, William J, 1988. "The Industrial Organization of Congress; or, Why Legislatures, Like Firms, Are Not Organized as Markets," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 132-63, February.
- Weingast, Barry R & Shepsle, Kenneth A & Johnsen, Christopher, 1981. "The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 642-64, August.
- Bogart, William T. & Bradford, David F. & Williams, Michael G., 1992. "Incidence Effects of a State Fiscal Policy Shift: The Florio Initiatives in New Jersey," National Tax Journal, National Tax Association, vol. 45(4), pages 371-87, December.
- Bailey, Stephen J & Connolly, Stephen, 1998. "The Flypaper Effect: Identifying Areas for Further Research," Public Choice, Springer, vol. 95(3-4), pages 335-61, June.
- Feldstein, Martin S, 1975. "Wealth Neutrality and Local Choice in Public Education," American Economic Review, American Economic Association, vol. 65(1), pages 75-89, March.
- Gamkhar, Shama & Oates, Wallace E., 1996. "Asymmetries in the Response to Increases and Decreases in Intergovernmental Grants: Some Empirical Findings," National Tax Journal, National Tax Association, vol. 49(4), pages 501-12, December.
- Hamilton, Jonathan H., 1986. "The flypaper effect and the deadweight loss from taxation," Journal of Urban Economics, Elsevier, vol. 19(2), pages 148-155, March.
- Wittman, Donald, 1989. "Why Democracies Produce Efficient Results," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1395-1424, December.
This item is featured on the following reading lists or Wikipedia pages:
When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:92:y:2002:i:1:p:71-92. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros)or (Michael P. Albert)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.