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Special Interest Groups and the Allocation of Public Funds

  • Monica Singhal

A 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12037.

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Date of creation: Feb 2006
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Publication status: published as Singhal, Monica. "Special Interest Groups and the Allocation of Public Funds." Journal of Public Economics 92, 3-4(April 2008): 548-564.
Handle: RePEc:nbr:nberwo:12037
Note: PE
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