Exploring the Sub-State Intergovernmental Game
26 Pages Posted: 20 Apr 2020 Last revised: 23 Apr 2020
Date Written: March 27, 2020
Cooperative budgeting arrangements between state and local governments jointly fund local programs. The mix of state and local revenues contributed to these arrangements can change as budget priorities shift over time. This study examines the strategic choices public officials make as they determine their contributions to jointly-funded programs. Using a game theory model known as the “Diner’s Dilemma”, the analysis explores how each level of government considers how much revenue to contribute and whether it can induce its partner to increase their level of support. This analysis applies primarily to local programs with regional externalities. The model illustrates how local efforts to aggressively try to shift costs to the state government can backfire, particularly during periods of state fiscal stress.
Keywords: Fiscal Federalism, Game Theory, Intergovernmental Revenue, Collaborative Budgeting
JEL Classification: H40, H54, H72, D03
Suggested Citation: Suggested Citation