Special Interest Groups and the Allocation of Public Funds

50 Pages Posted: 10 Feb 2006

See all articles by Monica Singhal

Monica Singhal

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2006

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: Business and Government Policy, Economics - Microeconomics, Electoral Politics, Intergovernmental Relations, Political Science

JEL Classification: H7, D7, H1

Suggested Citation

Singhal, Monica, Special Interest Groups and the Allocation of Public Funds (February 2006). KSG Working Paper No. RWP06-004, Available at SSRN: https://ssrn.com/abstract=880436 or http://dx.doi.org/10.2139/ssrn.880436

Monica Singhal (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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HOME PAGE: http://ksgfaculty.harvard.edu/monica_singhal

National Bureau of Economic Research (NBER) ( email )

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