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A b s t r a c t One well-documented p a t t e r n i n l o c a l p u b l i c f i n a n c e i s t h a t , i n comparison w i t h what i s spent o u t o f r e s i d e n t s ' p r i v a t e income, a d i s p r o p o r t i o n a t e amount o f the lump-sum a i d received from h i g h e r l e v e l s o f government i s used t o increase expenditures r a t h e r than reduce l o c a l taxes. This paper shows how a b u r e a u c r a t i c model o f t h e type suggested by Niskanen (1971) can be used t o e x p l a i n t h i s behavior. A t e s t o f the model, u s i n g 115 small c i t y governments i n Michigan, f i n d s t h a t the bureaucratic model explains c a p i t a l expenditures w e l l , w h i l e o p e r a t i n g expenditures appear t o be b e t t e r explained by the standard median v o t e r model. I. I n t r o d u c t i o n E a r l y w r i t e r s i n the t h e o r y o f p u b l i c choice recognized a connection between the outcome o f e l e c t o r a l processes and t h e demands o f a p a r t i c u l a r c o n s t i tuent--the median v o t e r (see Hotel 1 i ng C19291, Black 11 9481, and Bowen C19431). Consistent w i t h t h i s hypothesis, l a t e r e m p i r i c a l a n a l y s t s (see Borcherding and Deacon C19721, Bergstrom and Goodman C19731, and Inman C19781) showed t h a t s t a t i s t i c a l l y s i g n i f i c a n t r e l a t i o n s h i p s e x i s t between l o c a l government expenditures and the median v o t e r ' s income and t a x p r i c e . The median v o t e r model, however, faces serious t h e o r e t i c a l and e m p i r i c a l challenges. One d i f f i c u l t y i s the t r o u b l i n g p o s s i b i l i t y t h a t t h e o u t p u t of t h e community (and

Using a utility-based graphical model of bureaucratic choice, this paper develops four empirical predictions from the theory of slack-maximizing bureaucracy. These predictions are compared to those resulting from the Niskauen budget-maximizing model of bureaucracy. Slackmaximizing and budget-maximizing bureaucracies are similar in their response to changes in cost and in their generation of "flypaper effects", but they differ in their responses to matching and lump-sum grants.

A b s t r a c tOne well-documented p a t t e r n i n l o c a l p u b l i c f i n a n c e i s t h a t , i n comparison w i t h what i s spent o u t o f r e s i d e n t s ' p r i v a t e income, a d i s p r o p o r t i o n a t e amount o f the lump-sum a i d received from h i g h e r l e v e l s o f government i s used t o increase expenditures r a t h e r than reduce l o c a l taxes. This paper shows how a b u r e a u c r a t i c model o f t h e type suggested by Niskanen (1971) can be used t o e x p l a i n t h i s behavior. A t e s t o f the model, u s i n g 115 small c i t y governments i n Michigan, f i n d s t h a t the bureaucratic model explains c a p i t a l expenditures w e l l , w h i l e o p e r a t i n g expenditures appear t o be b e t t e r explained by the standard median v o t e r model. I. I n t r o d u c t i o n E a r l y w r i t e r s i n the t h e o r y o f p u b l i c choice recognized a connectionbetween the outcome o f e l e c t o r a l processes and t h e demands o f a p a r t i c u l a r c o n s t i tuent--the median v o t e r (see Hotel 1 i ng C19291, Black 11 9481, and Bowen C19431). Consistent w i t h t h i s hypothesis, l a t e r e m p i r i c a l a n a l y s t s (see Borcherding and Deacon C19721, Bergstrom and Goodman C19731, and Inman C19781)showed t h a t s t a t i s t i c a l l y s i g n i f i c a n t r e l a t i o n s h i p s e x i s t between l o c a l government expenditures and the median v o t e r ' s income and t a x p r i c e . The median v o t e r model, however, faces serious t h e o r e t i c a l and e m p i r i c a l challenges. One d i f f i c u l t y i s the t r o u b l i n g p o s s i b i l i t y t h a t t h e o u t p u t of t h e community (and

This article makes a simple but heretofore unappreciated point: In urban areas, voter movement will cause equalizing intergovernmental aid (such as state education aid) to be capitalized into the value of housing. Because poor voters are likely to be renters, they will have to pay for better schools created by state aid through higher housing costs. To establish this point, the article describes a very simple model of an urban area with two communities and three income groups. In the case of an urban area in which the central city is not large relative to the metropolitan region, the welfare effect of intergovernmental aid on poor voters is completely offset by higher housing costs. Rather than increasing the total resources available to poor people, intergovernmental aid amounts to a Hicksian price adjustment that leaves the poor no better off than before. The article then discusses real-world complications to the model, including alternative decision-making mechanisms and preferences, and concludes that capitalization is an important overlooked feature in education grant systems.