Panel Paper: Crowding-in or Crowding-out? Evidence of the Fly Paper Effect of Federal Reinvestment and Recovery Act Education Grants on State and Local Government Spending

Friday, November 9, 2018
McKinley - Mezz Level (Marriott Wardman Park)

*Names in bold indicate Presenter

Ngoc Dao and Sian Mughan, Indiana University

This paper examines how state and local governments adjusted spending in response to a large temporary increase in federal education grants under the 2009 American Recovery and Reinvestment Act (ARRA). The federal stimulus funding for education was distributed through a variety of grants, the largest of which was the Education Stabilization Fund. We exploit variation in the features of the grants to test for the flypaper effect under different conditions. We address the endogeneity of ARRA grants received by using the state’s pre-recession spending level and education reform initiative to instrument for the ARRA fiscal relief each state received. Using the data from the Survey of State and Local Government Finances and National Center for Education Statistics from 2005 to 2011 we will test the hypothesis education grants received under the ARRA increased state and local education spending. We will also test for heterogeneous treatment effects. We hypothesize Education Stabilization grants are more likely to crowd out state government education spending when education finance is highly centralized. Additionally, because state governments have a larger variety of expenditure obligations they are expected to be more likely than local governments to use ARRA grants to reduce taxes or debt obligations.