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Extensive or Intensive Generosity? The Price and Income Effects of Federal Grants

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  • Katherine Baicker

    (Dartmouth College and NBER)

Abstract

Knowing the responsiveness of state spending to federal subsidies along different dimensions allows for the optimal design of joint federal-state programs. Welfare is an important case in point: states have the ability to choose both the extent of welfare eligibility and the intensity of benefits provided through the program. This paper estimates the sensitivity of state spending to separate federal subsidies for increasing benefits and for increasing recipients. Because the federal match rate schedule changed several times during the early years that I study, I am able to estimate elasticities in a way that is not biased by the endogenous relationship between income, spending, and federal contributions. I find that state behavior is quite sensitive to these federal subsidies (and much more sensitive than a simple OLS regression would imply). A 10% increase in the cost of benefits causes a 3.8% decrease in benefit amounts, whereas a 10% increase in the cost of recipients causes a 2.8% decrease in the number of recipients. Cross price elasticities are positive, implying a substitutability of extensive for intensive generosity and making an analysis of total spending without such a decomposition misleading. States appear sensitive to their neighbors' benefit levels, and may also use nonincome recipiency requirements to adjust to changes in prices. These results suggest that the federal government has untapped policy instruments at its disposal to affect the nature of welfare spending. © 2005 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Katherine Baicker, 2005. "Extensive or Intensive Generosity? The Price and Income Effects of Federal Grants," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 371-384, May.
    • Handle: RePEc:tpr:restat:v:87:y:2005:i:2:p:371-384
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    Citations

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    Cited by:

    1. Linda Toolsema & Maarten Allers, 2014. "Welfare Financing: Grant Allocation and Efficiency," De Economist, Springer, vol. 162(2), pages 147-166, June.
    2. repec:dgr:rugsom:12004-eef is not listed on IDEAS
    3. Andreea Balan-Cohen, 2008. "Healthy, Wealthy, and Wise? The Impact of the Old Age Assistance Program on Elderly Mortality in the United States," Discussion Papers Series, Department of Economics, Tufts University 0719, Department of Economics, Tufts University.
    4. Cassidy, Traviss, 2017. "Revenue Persistence and Public Service Delivery," MPRA Paper 114464, University Library of Munich, Germany, revised 06 Sep 2022.
    5. SandraE. Black & PaulJ. Devereux & KjellG. Salvanes, 2008. "Staying in the Classroom and out of the maternity ward? The effect of compulsory schooling laws on teenage births," Economic Journal, Royal Economic Society, vol. 118(530), pages 1025-1054, July.
    6. Toolsema-Veldman, Linda & Allers, M.A., 2012. "Welfare financing," Research Report 12004-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    7. Cassidy, Traviss, 2017. "How Forward-Looking Are Local Governments? Evidence from Indonesia," MPRA Paper 97776, University Library of Munich, Germany, revised 01 Jun 2019.
    8. Jeffrey Clemens & Stan Veuger, 2024. "Intergovernmental Grants and Policy Competition: Concepts, Institutions, and Evidence," NBER Chapters, in: Policy Responses to Tax Competition, National Bureau of Economic Research, Inc.
    9. Mörk, Eva & Ottosson, Lillit & Vikman, Ulrika, 2021. "To work or not to work? Effects of temporary public employment on future employment and benefits," Working Paper Series 2021:12, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    10. James R. Hines Jr., 2010. "State Fiscal Policies and Transitory Income Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(2 (Fall)), pages 313-350.
    11. Masayoshi Hayashi, 2017. "Do Central Grants Affect Welfare Caseloads? Evidence from Public Assistance in Japan," CIRJE F-Series CIRJE-F-1064, CIRJE, Faculty of Economics, University of Tokyo.
    12. Leung, Pauline, 2022. "State responses to federal matching grants: The case of medicaid," Journal of Public Economics, Elsevier, vol. 216(C).
    13. Craig, Steven G. & Howard, Larry L., 2014. "Is Medicaid crowding out other state government expenditure? Internal financing and cross-program substitution," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 164-178.
    14. Daniel K. Fetter, 2016. "Local Government and Old-Age Support in the New Deal," NBER Working Papers 22760, National Bureau of Economic Research, Inc.
    15. Larry L. Howard, 2010. "Is the Demand for Health Care Generosity Equal for All Recipients? A Longitudinal Analysis of State Medicaid Spending, 1977-2004," Public Finance Review, , vol. 38(3), pages 346-377, May.
    16. Larry Howard, 2014. "Do the Medicaid and Medicare programs compete for access to health care services? A longitudinal analysis of physician fees, 1998–2004," International Journal of Health Economics and Management, Springer, vol. 14(3), pages 229-250, September.
    17. Luis Ayala Cañón & Ángela Triguero Cano, 2017. "Economic Downturns, Endogenous Government Policy and Welfare Caseloads," Hacienda Pública Española / Review of Public Economics, IEF, vol. 220(1), pages 107-136, March.
    18. Lucy Kok & Caren Tempelman & Pierre Koning & Lennart Kroon & Caroline Berden, 2017. "Do Incentives for Municipalities Reduce the Welfare Caseload? Evaluation of a Welfare Reform in the Netherlands," De Economist, Springer, vol. 165(1), pages 23-42, March.
    19. Luis Ayala & Elena Bárcena-Martín, 2016. "A unified approach for measuring welfare protection under a decentralized framework," Working Papers 405, ECINEQ, Society for the Study of Economic Inequality.
    20. Hansen, Mary Eschelbach, 2007. "State-designated special needs, post-adoption support, and state fiscal stress," Children and Youth Services Review, Elsevier, vol. 29(11), pages 1411-1425, November.

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