Fiscal federalism explains the role of federal grants as either ensuring fiscal equalization among states of differing economic capacities or compensating for spillover effects across local jurisdictions.  However, this type of explanation only explains a basis for federal intervention.  That is, government may intervene when residents in one jurisdiction have substantially fewer public services than others.  However, that goal does not explain the decision to use grant as a vehicle to solve the problem.  The problem of fiscal disparities can easily be solved through direct federal provision of goods or services to individual households.  Similarly, there is a role for government in discouraging potentially uncompensated spillover effects in the provision of public goods; however, that doesn’t explain the hypothetical use of grants as a solution when many alternative solutions may be available.   In fact, the choice of grants may be seen as the least efficient way to solve economic problems given the fungibility of resources.  Certainly, the flypaper effect suggests that the funds will have a positive marginal impact on local spending.  However, should the central government use direct provision, all the intended funds will be directed to their intended purpose with no substitution.

This paper examines the determinants of the decision to design a program as a grant.  Using data from the Catalog of Federal Domestic Assistance (CFDA) and the OMB Public Budgeting Database, we will examine the political and economic conditions present in the year before a program was created to understand what contributed to the choice of direct provision or a grant program structure. Thus we examine the political environment, hypothesizing that direct central government provision offers greater potential for legislative credit claiming.  This determinant may be affected by the types of coalitions in Congress.  When the Congress is unified there is the potential for partisan credit claiming.   On the hand, a divided government may also choose to defer the details on program decision making, pushing difficult decisions to the states.  Finally, the partisan composition of state governments may also determine how attractive they are for Congress.  Congress, having an option to choose an administering agent can choose either the federal bureaucracy or states.  The use of grants or direct federal provision may be a way to shifting the program management toward a political more sympathetic program manager.