American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program
American Economic Review
vol. 92,
no. 1, March 2002
(pp. 71–92)
Abstract
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)Citation
Knight, Brian. 2002. "Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program ." American Economic Review, 92 (1): 71–92. DOI: 10.1257/000282802760015612JEL Classification
- H72 State and Local Budget and Expenditures
- H77 Intergovernmental Relations; Federalism; Secession
- H54 National Government Expenditures and Related Policies: Infrastructures; Other Public Investment and Capital Stock