Is a Good Normative Model of Public Spending Run Backward a Good Positive Model?

23 Pages Posted: 3 Jun 2017

See all articles by Fred Thompson

Fred Thompson

Willamette University - Atkinson Graduate School of Management

Kawika Pierson

Willamette University - Atkinson Graduate School of Management; affiliation not provided to SSRN

Michael L. Hand

Willamette University - Atkinson Graduate School of Management

Michael U. Dothan

Willamette University - Atkinson Graduate School of Management

Date Written: Summer 2017

Abstract

We test a positive model of government spending and savings, where jurisdictions seek to stabilize spending growth and where revenue growth and savings are assumed to be continuous‐time stochastic processes, the Dothan–Thompson optimal budget model. Our empirical tests address two reduced‐form specifications derived from this model, each applied to two different subsets of municipalities. For each of the two specifications, we first estimated models using data for all available municipalities (more than 20,000) covered by the U.S. Census government finance data, and then tested them again on a much smaller balanced subset of the full panel. We find that municipalities do not, on average, optimally stabilize spending in the face of revenue volatility, nor do they consistently use savings to do so. There is, however, at least modest statistical evidence that savings reflect revenue volatility at typical levels of volatility. For all model specifications tested, the single greatest determinant of savings at the municipal level is the state in which the municipality is located. The next challenge is to identify and measure the impact of the underlying factors that explain the dramatic state‐to‐state differences observed in municipal savings patterns.

Suggested Citation

Thompson, Fred and Pierson, Kawika and Hand, Michael L. and Dothan, Michael U., Is a Good Normative Model of Public Spending Run Backward a Good Positive Model? (Summer 2017). Public Budgeting & Finance, Vol. 37, Issue 2, pp. 35-57, 2017. Available at SSRN: https://ssrn.com/abstract=2979712 or http://dx.doi.org/10.1111/pbaf.12121

Fred Thompson (Contact Author)

Willamette University - Atkinson Graduate School of Management ( email )

900 State Street
Salem, OR 97301
United States
503-370-6228 (Phone)
503-370-3011 (Fax)

Kawika Pierson

Willamette University - Atkinson Graduate School of Management ( email )

900 State Street
Salem, OR 97301
United States

affiliation not provided to SSRN

Michael L. Hand

Willamette University - Atkinson Graduate School of Management ( email )

900 State Street
Salem, OR 97301
United States

Michael U. Dothan

Willamette University - Atkinson Graduate School of Management ( email )

900 State Street
Salem, OR 97301
United States
(503) 370-6440 (Phone)

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