Intergovernmental grants and demand for local education : income vs. price illusion

This dissertation examines the relationship between intergovernmental grants and the budget perceptions of local voters. Enrichment of the decisive voter model to include imperfect grant information creates a discrepancy between voter's actual and perceived budget constraints. The innovation in this model is that it distinguishes between types of grant illusion and separately tests for the magnitude of each. The empirical investigation employs local education finances pooled for 40 U.S. states and the 1966-1980 period. Estimation of this model which carefully specifies the decisive voter's full budget constraint incorporates a two-stage least-squares procedure appropriate for the estimation of models that are nonlinear in both parameters and endogenous variables. Empirical analysis identifies two types of Illusion as significant determinants of voter behavior. These unbiased estimates reveal that previous research has mispecified the budget constraint, resulting in overestimation of the stimulative effects of intergovernmental grants on local expenditure.Economics, Department o