From a political economy perspective, fiscal federalism is foundational to questions around effective municipal service provision, including economic development (Brueckner, 2003; Craw, 2010; Volden, 2005). Yet by and large the literature at the municipal scale has ignored the manner in which state-level conditions and fiscal institutions frame the decision making of municipalities nested within them. This paper advances the literature on intergovernmental management by developing and testing a model of the manner in which state level institutions and policies affect municipal public management, focusing in particular on the case of economic development. This analysis is guided by the question: are municipal decisions to invest in economic development activities influenced by state government decisions? I use hierarchical linear modeling methods to predict the effect of state institutions and policies on two distinct measures of municipal economic development investment. The model is tested on a data set using Census of Governments and several supplemental sources. While preliminary, the initial findings suggest that both the level of direct investment and the decision to engage in debt financing for private development are sensitive to state institutional design, particularly the degree of autonomy afforded local governments; the perception of its regulatory friendliness to businesses; and whether tax and expenditure limits are imposed at the state level.