The political economy of intergovernmental grants

Abstract

We study the effect of politics on the distribution of intergovernmental grants. We consider a model where local government officials lobby the central government who in turn distributes grants based on the local governments’ lobbying efforts. We argue that the marginal costs of lobbying increase with the geographical and ‘political’ distance from the central government capital. Hence, in equilibrium, grants should decrease with a jurisdiction’s distance from the capital. Moreover, grants to a jurisdiction which produces spillover benefits for other jurisdictions will meet less opposition. Therefore, higher spillover benefits will imply more grants to the jurisdiction producing the spillover in equilibrium. Using data from California counties, we find support for our model.