Working Paper: NBER ID: w12037
Authors: Monica Singhal
Abstract: 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.
Keywords: public funds; special interest groups; tobacco settlement; government spending
JEL Codes: H7; D7; H1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Settlement funds (G33) | per capita spending on tobacco control (H51) |
| Settlement funds (G33) | marginal propensity to spend on tobacco control (H51) |
| Other income (G29) | marginal propensity to spend on tobacco control (H51) |
| Interest group involvement (D72) | state spending on tobacco control (H76) |
| Political partisanship (D72) | state spending on tobacco control (H76) |
| Eligibility for reelection (K16) | state spending on tobacco control (H76) |