Copycatting: Fiscal Policies of States and Their Neighbors
NBER Working Paper No. 3032 (Also Reprint No. r1847)
This paper formalizes and tests the notion that state governments' expenditures depend on the spending of similarly situated states. We find that even after allowing for fixed state effects, year effects, and common random effects between neighbors, as state government's level of per capita expenditure is positively and significantly affected by the expenditure levels of its neighbors. Ceteris paribus, a one dollar increase in a state's neighbors' expenditures increases its own expenditure by over 70 cents.
Published: "Budget Spillover and Fiscal Policy Interdependence: Evidence from the States", Journal of Public Economics, vol. 52, October 1993, p. 285-307