Substitution and Supplementation Between Co-Functional Policy Instruments: Evidence from State Budget Stabilization Practices

Abstract

Governments often use multiple policy instruments for pursuing policy goals with mutually reinforcing effects. These effects include supplementation and substitution. This article examines both effects by studying two instruments of state budget stabilization policy: general fund balances and budget stabilization funds. States normally maintain budget surpluses in the general fund. In recent decades, many also created separate budget stabilization funds to guard against economic downturns. Empirical results show that substitution occurs between these instruments. In other words, the influence of the first instrument is partially offset by the second. The second instrument also produces some independent impacts—called supplementation—that increase the overall influence of both instruments. Such self-reinforcement decreases over time, suggesting that multiple policy instruments are most effective in the initial stage of application.