Chapter 28
1. What are the different forms or structures that grants-in-aid can have?
2.
a. In the context of the standard or conventional model of fiscal federalism, what
kind of imperfection leads to a role for grants-in-aid in optimally accounting for
externalities?
b. What form should the grant take and what other properties should it have?
c. Why, in practice, is the imperfection likely to cause a variety of complex
individualized externalities?
3. Economists have developed a number of prescriptions for designing grants-in-aid that
redistribute income within a state from richer to poorer communities, in the name of
equalizing fiscal capacities. Why are such grant-in-aid formulas essentially ad hoc
additions to the standard or conventional model of fiscal federalism?
4.
a. What is LeGrand's measure of fiscal capacity?
b. How does he use his measure to define a set of redistributive grants to equalize
fiscal capacities among localities?
c. How did Bradbury, et. al., modify the LeGrand prescription to apply it to
Massachusetts cities and towns? Was their formula more or less redistributive than
LeGrand's prescription?
d. How did they measure a locality's fiscal capacity?
e. How do the EU cohesion grants differ from LeGrand's recommended grants?
5. How did Feldstein propose to make local education expenditures independent of a
community's wealth?
6. The median voter model has been the primary model behind attempts to estimate the
demand for state and local government services
a. What are the political assumptions behind the model?
b. In what ways are these assumptions somewhat problematic?
6.
A number of economic assumptions are made in developing an estimating
equation based on the median voter model? In particular:
a. What is the median voter trying to maximize?
b. What price does the median voter face for a publicly provided service and
what assumptions lie behind that price?
c. Why is it often required to assume that the median voter has the median value
within the state or locality of income and other economic control variables that are
entered into the estimating equation?
d. Why are many of the economic assumptions behind the estimating equation
problematic?
e. What does empirical analysis suggest about the relative values of the income
and price elasticities of the demand for public services?
2
7.
a. Why is a state or locality's response to grants-in-aid embedded within the
estimating equation of the median voter model?
b. Why are most grants-in-aid seen as equivalent to increases in income from the
perspective of the median voter?
c. If the grants are equivalent, does this mean the coefficients on the income term
and the grants-per-capita will be equal?
d. What is the flypaper effect and how is it measured by means of the median
voter model?
8.
a. Do empirical estimates suggest that the flypaper effect of grants-in-aid is large
or small?
b. What are some of the explanation for the flypaper effect in the federalism
literature?
9. Why does the use of median data lead to so-called Tiebout bias in estimating the
demand for state and local services?
10.
a. What are the advantages and disadvantages of using surveys relative to the
median voter model to estimate the demand for local public services?
b. Why does the estimation of a model with qualitative survey responses (more
than, the same, less than) imply a probabilistic estimating strategy?
11.
a. What features of project grants make them somewhat distinct from other kinds
of grants-in-aid?
b. In Chernick's model of project grants, why to the bureaucrats running the
granting agencies have an incentive to change the stated matching rates on the grants into
a combination of lower matching rates and a fungible portion of the grant?
c. Why do the bureaucrats of the receiving agencies have the same incentives?
What private information can they exploit and how do they exploit it?
d. McGuire developed a strategy for estimating the fungible and matching
portions of project grants. What did he find regarding the price elasticities of these grants
that supports the granting agencies being willing to negotiate the grant parameters?