The Spillover Effects of State Spending
NBER Working Paper No. 8383
This paper estimates the degree to which state spending is influenced by the spending of neighboring states. Focusing on mandated increases in welfare spending, I find that each dollar of state spending causes spending in neighboring states to increase by 37 to 88 cents. I use more plausibly exogenous variation than previous studies to abstract from the endogeneity of neighbors' spending, and show that previous estimates may have been biased. I also explore the strength of several different measures of neighborliness. The most predictive measure is the degree of population mobility between states, suggesting that concerns about migration may drive the interdependence of state spending policy.
Published: Baicker, Katherine. "The Spillover Effects Of State Spending," Journal of Public Economics, 2005, v89(2-3,Feb), 529-544.