The Political Economy of Federalism

Abstract

This article introduces a theoretical framework and an econometric methodology for analyzing the increasingly important effects of the national government on the federal system. The framework is a synthesis of the dominant political and economic approaches to this issue: it attempts to capture key elements of the complex political and administrative processes that implementation research has identified in contemporary federalism, and to exploit formal models of local fiscal choice used to analyze the impact of federal grants on state and local spending and taxing. The vehicle for the synthesis is a principal-agent model which represents the federal system as a formal hierarchy extending from Congress and the president to subnational bureaucrats. An econometric analysis of two major federal grant programs in each state for the years, 1965-1979, demonstrates that 1) economic models alone cannot explain the effects of federal grants on subnational fiscal behavior; politics must be included, and 2) the political effects can be disaggregated into ideological and constituency-oriented demands made by Congress and the White House on federal grant agencies.