Politics, Capacity, and Pass-Through Decisions in the American States: Evidence from the American Recovery and Reinvestment Act

State governments have considerable discretion regarding when they use federal grants to deliver goods and service themselves and when they pass those grants through to fund service delivery by local governments, nonprofit organizations, and other substate entities. This discretion influences the expenditure, and potentially the impact, of many billions of dollars every year. Unfortunately, we know very little about the decisions states make regarding the volume of federal grant aid they pass through, or about the types of subrecipients most likely to receive that money. Drawing on delegation theory, this study develops the argument that the amount and target of pass-through funding will be a function of the state's capacity to produce desired goods, shared policy preferences between state and local actors, and the relative capacity of substate actors to produce those same goods. We test these hypotheses in analyses of the pass-through of ARRA grants to subrecipients by state governments between 2009 and 2012. The results from those analyses suggest that delegation theory provides a useful way to understand both the volume of pass-through that states engage in as well as the target of those monies.