| Abstract: | This paper examines the effect of federal government grants on state fiscal decisions. The study presents a disaggregated analysis of state government that allows for the precise measurement of important fiscal effects. State government is modeled as maximizing a social welfare function defined over government expenditures and taxes. The positive theory of grant response is tested and confirmed. The results indicate that matching grants stimulate government expenditures more than nonmatching grants. The results also suggest that federal grant cutbacks will lead to reductions in state expenditures for all key programs but that the composition of this change will depend on the nature of the federal cutbacks. |
