Strategic Spending in Federal Government: Theory and Evidence from the Us
Abstract: Past research on the allocation of federal resources to localities has failed to take into account the interaction between federal and state governments. I address this gap by modeling the interaction as a sequential move game in which federal and state governments that are politically aligned (i.e., represented by politicians from the same party) have the same preferences over distribution of resources to localities. Instead, when these two levels of government are not aligned, they have different preferences. The main implication of the model is that the federal government increases funds to politically aligned local districts only when they are inside non-aligned states. Using expenditure data from the Census of Governments for 1982-2002, and a difference in differences strategy, I find that the main implications of the model are upheld in the data. Results are robust to many sub-samples, specifications, and alternative estimation methods. My findings have implications for normative studies of decentralization. In particular, the welfare impact of decentralization could depend on the strategic incentives it creates at various levels of government.
