Supplement, Not Supplant? The Political Economy of Federal Education Grants PDF Download

Author: Rebecca Goldstein
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Languages : en
Pages : 51

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Book Description
How does the transfer of federal revenue to subnational governments affect revenue-raising behavior at the subnational level? This paper uses education finance data to examine the relationship between fiscal federalism, ethnic diversity, and the behavior of local governments in public goods provision. I expand a model by Alesina, Baqir, and Easterly (1999) to allow for two different public goods, one provided by the federal government and one provided by the local government, taking into account that citizens in a federal system pay comparatively more directly for services provided by the local government than for services provided by the federal government. It finds that although there is an inverse relationship between a local school district's level of ethnic fractionalization and its locally-raised revenue, the federal government partially compensates for this phenomenon: a district's demographic change from 90 percent white, 5 percent black, and 5 percent Hispanic to 80 percent white, 15 percent black, and 5 percent Hispanic is associated with a $23,428 (6 percent) increase in federal revenue and a $81,187 (2.5 percent) decrease in local revenue, meaning the federal government compensates for about one-third of the loss in local revenue in the event of such a demographic change. Given my finding of federal compensation for lower spending, I consider whether local school districts behave strategically more broadly in order to qualify for additional federal grants, and find some evidence that they do.