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