BUDGET SPILLOVERS AND FISCAL-POLICY INTERDEPENDENCE - EVIDENCE FROM THE STATES

This paper formalizes and tests the notion that states' expenditures d epend on the spending of similarly situated states. We find that even after allowing for fixed state effects, year effects, and common rando m shocks among neighbors, a state government's level of per capita exp enditure is positively and significantly affected by the expenditure l evels of its neighbors. Ceteris paribus, a one dollar increase in a st ate's neighbors' expenditures increases its own expenditure by over 70 cents.