Analyzing the Effects of Local Government Fiscal Activity I: Sampling Model and Basic Econometrics

Abstract

At the intersection of urban politics, fiscal federalism, and political economy in the United States, probably the most important theoretical development in political science in the past 15 years has been the argument put forth by Paul Peterson inCity Limits(1981). Informed by Tiebout (1956), Musgrave (1959), and Lowi (1964), Peterson uses the incidence of local government taxes and spending to develop an interest-driven theory of federalism and local politics. Peterson proposes a typology of local government expenditures, based on the degree to which the expenditures tend to be directed toward above-average or below-average taxpayers. Peterson assumes that expenditures of the former kind are beneficial for local economic well-being, while expenditures of the latter sort are, in general, harmful. These two kinds of expenditures he refers to as, respectively, “developmental” and “redistributive.” Expenditures of neutral incidence, and according to Peterson also of neutral economic consequence, are referred to as “allocational” (1981, 34-46).