I propose a fully rational model of government contracting that explains differences in local government spending from grants and other income. In this model, violations of fungibility arise from dynamic interactions between politicians and interest groups with the ability to raise funds for the...

One of the most dramatic changes in the fiscal federalism landscape during the postwar period has been the rapid growth in state budgets, which almost tripled as a share of GDP and doubled as a share of government spending between 1952 and 2006. We argue that the greater role of states cannot be...