National and regional repercussions of regional reallocations of federal expenditures and public services

Abstract

This paper considers the problem of regional allocation of government funds in a two-region, two-good economy in which production of each good requires labor, capital, and a local public good. Changes in regional allocation of federal expenditures and public services are found to signi®cantly impact the national economy in addition to the regional economies. For example, output of both regions and the national economy may decrease (or increase) as a result of such reallocation. This is because, output of a region directly depends on the fraction of federal funds spent in that region, and indirectly on output of the other region. Thus even if the proportion of government funds increases for a region, its output may actually decline if the fall in the fraction of government resources for the other region signi®cantly decreases production there. Our results demonstrate that in addition to the amount of government expenditures and public services, an economy's capital accumulation, production, and factor returns are signi®cantly in¯uenced by how these government expenditures and public services are regionally allocated.