The Effects of State Grants on Public Sector Spending by Function

Abstract

This paper devises conceptual models of vote-maximizing politicians and examines the grantor-level politicians' preferences for direct spending by function rather than state grants. In contrast to other studies, this paper develops models which specifically look at the effects of state grants on state and local expenditures by function. It also goes beyond previous works in this area by considering the effects of state grants on the sum of state and local expenditures by function and on the total public sector. This paper develops 6 models which explain the relation￢ships between state grants and state, local, and public sector spending. The models are tested with data from the 48 contiguous states for the years 1979, 1985, and 1990. The results show that a state with higher level of state grants is more likely to have a higher level of state expenditures for correction and education and a lower level of state public welfare spending. The results of our analysis also show that state grants stimulate local expenditures for correction, education, highways, police protection, wages, and public welfare and that greater state grants increase public sector expenditures for correction, education, police protection, wage, and public welfare.