Endogenous Federal Grants and Crowd-out of State Government Spending : Theory and Evidence from the Federal Highway Aid Program

@inproceedings{Oates2002EndogenousFG,
  title={Endogenous Federal Grants and Crowd-out of State Government Spending : Theory and Evidence from the Federal Highway Aid Program},
  author={Wallace E. Oates},
  year={2002}
}
Contrary to simple theoretical predictions, existing evidence suggests that federal grants do not crowd out state government spending. A legislative bargaining model with endogenous grants documents a positive correlation between grant receipts and preferences for public goods; this correlation has likely biased existing work against measuring crowd-out. To correct for such endogeneity, the model motivates instruments based on the political power of state congressional delegations. Exploiting… CONTINUE READING

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