TY  - JOUR
AU  - Singhal,Monica
TI  - Special Interest Groups and the Allocation of Public Funds
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12037
PY  - 2006
Y2  - February 2006
UR  - http://www.nber.org/papers/w12037
L1  - http://www.nber.org/papers/w12037.pdf
N1  - Author contact info:
Monica Singhal
Harvard University
JFK School of Government
79 JFK Street
Cambridge, MA 02138
Tel: 617/496-5062
Fax: 617/496-6372
E-Mail: monica_singhal@harvard.edu
AB  - 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.
ER  -