Measuring the Effects of Federal Grants-in-Aid on Total Public Sector Size

Abstract

Empirical studies of intergovernmental grants have applied a partial-equilibrium framework to investigate the marginal effects of grants on the spending by recipient governments, and generally conclude that all grants do stimulate such spending. Although it is tempting to interpret this to mean that an increase in grants therefore always increases aggregate government spending, such a conclusion gives no consideration to the underlying cause of a change in grant amounts or their financing. A general-equilibrium model that explains the aggregate effect of grants, as well as their existence, is used herein to estimate the aggregate stimulative effect of intergovernmental grants.