Abstract
Most U.S. federal grants are allocated through arguably obsolete formulas, leading fast growing states to contend that they are not receiving their fair share of such grants. We examine this issue by analyzing the allocation of formula and non-formula grants during the period 1978–2008. We find that states with fast growing populations are penalized in the allocation of formula grants, whereas for non-formula grants population dynamics does not play a significant role. The estimated losses are sizable and heavily concentrated among the three fastest growing states — Nevada, Arizona, and Florida. Nevertheless, the majority of the U.S. states benefit from formula allocation, thus providing a plausible explanation for the status quo bias in budgetary formulas.
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