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Spatially targeted government spending and heterogeneous constituent cost shares.

Article Excerpt
I. Introduction

Political economists have long viewed fiscal policy in democracies as a common pool problem--a tragedy of the fiscal commons. Self-interested politicians seek to direct public resources from the common budgetary pool toward their constituents in order to enhance their political standing. A higher level of government spending, an overgrazing of the fiscal commons, is the result as logrolling politicians collude to support each other's projects. As noted by Tullock (1959), such overspending is facilitated by majority rule because party membership reduces the bargaining costs of logrolling and because the majority only bears a portion of the cost of public projects that benefit its interests. While the benefits of particular projects may be concentrated among a constituency, the tax costs are borne by the entire polity. Therefore, politicians may seek to approve local spending even where the total costs exceed the total benefits.

Weingast, Shepsle, and Johnsen (1981) applied the phenomenon of concentrated benefits funded by a dispersed tax burden to legislature size to develop the "law of 1/n."1 They hypothesized that the cost burden borne by constituents is a function of the number of geographically represented districts (n) in a legislature. Each district receives the full benefits of parochial spending, while bearing only 1/nth of the cost. As the number of legislative districts increases, the district cost share falls; thus, there exists a positive correlation between the number of legislative districts and public spending. Assuming legislators logroll with fellow members to ensure passage of pet projects until the gains from trade are exhausted (a phenomenon known as universalism), spending will exceed the optimal level.

In recent years the law of 1/n has received strong empirical support. Relying on variation in the number of seats in elective bodies, evidence supportive of the law of 1/n has been found across U.S. states (Gilligan and Matsusaka, 1995 and 2001; Campbell, Finney, and Mitchell, 2007), across countries (Bradbury and Crain, 2001; Perotti and Kontopoulos, 2002), and across local government units (Baqir, 2002; Bradbury and Stephenson, 2003; Schaltegger and Feld, 2009). However, these studies may suffer from an endogeneity problem between legislature or council size and government spending because preferences for greater government spending may also be correlated with a desire for a larger representative body. Indeed, citing this endogeneity critique, Petterson-Lidbom (2001) finds that exogenous, statutorially mandated increases in Swedish local council sizes are associated with lower government spending.

Rather than relying on variation in the size of elective bodies as a proxy for the local cost of spatially targeted government spending, this paper examines the relationship between tax shares and locally targeted government spending obtained from the common taxbase. (2) A common pool taxbase implies that districts bearing a small share of the tax burden will have higher amounts of locally targeted projects because they bear lower fractions of the costs than do districts with large shares of the tax burden. Symbolically, instead of approving all projects up to the point at which MB = C, politicians will approve projects up to the point at which MB = [T.sub.i]C, where MB is the marginal benefit of a project, [T.sub.i] is state i's share of the project's cost C, < [T.sub.i] < 1 and [SIGMA]...