We re-examine the tax-spending nexus using a panel of 50 US state-local government units between 1963 and 1997. We find that, unlike tax revenues, expenditures adjust to revert back to a long-term equilibrium relationship. The evidence on the short-term dynamics is also consistent with the tax-and-spend hypothesis. One implication of this finding is that the size of the government at the state-local level is not determined by expenditure demand, but rather by resource supply. This is consistent with the fact that many US state and local governments operate under constitutional or legislative limitations that seek to constrain deficits. JEL Classification: H71; H72; C33.

The empirical literature has generated mixed correlations between research and development (R&D) undertaken by domestic firms and the inflow of foreign direct investment (FDI) by their multinational rivals. Further, the existing theoretical explanations of such empirical results appear to be inadequate. This study presents an alternative game-theoretic explanation for the observed correlations. The results show that the seemingly contradictory observed mixed correlations can be explained in an encompassing model in terms of the multinationals' competitive and interactive assessment of the efficiency and expenditure consequences that domestic R&D could generate for the undertaking domestic competitors. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Ltd

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