ABSTRACT
Increasingly, the provision of public goods and services at the state-local level in this country is coming to depend upon a complexity of interacting budgetary decisions made at various levels in our governmental hierarchy. A foremost example is federal grants-in-aid which purposely attempt to influence or manipulate the allocation oflocal resources in line with federal objectives. As is evident from the literature,! economists have directed a
substantial effort toward investigating the effects of federal grant programs on "local" allocation decisions.2 With certain notable exceptions, this large body of analysis, however, has failed to distinguish price and income effects of federal grants. 3 The purpose of this chapter, therefore, is to develop empirically testable models for describing the impact of the grant-in-aid system in price and income terms. We are especially interested to examine the effect of grants upon local allocations among public sector categories; we are secondarily interested in how grants influence public and private distribution of expenditures. More specifically, we hope to illuminate three interrelated issues bearing upon the effective operation offederal grants.
