Welfare, innovation capacity, and economic performance: Evidence from American federalism

Abstract

Despite years of increased federal welfare spending, it is unclear how federal financial investments in welfare areas influence state economies. Based on the theory of functional federalism, this paper examines the impact of federal welfare spending on state economic performance. Employing error correction models, this research finds that state economic growth and volatility are directly observed by the long-term impact of welfare spending. The results also show that increased federal welfare spending boosts state economic performance indirectly, by motivating states to generate higher innovation capacity, especially, in knowledge-based economic development programs. This research extends our understanding of the determinants of state economic performance by addressing intergovernmental redistributive transfers, and state government's innovation capacity.

Advancing Public Entrepreneurship through State Government Capacity and Competitiveness: The Impact of Discretionary Fiscal Policy of American States on Worldwide Manufacturing Industries

“…Despite the relative breadth of economic, policy, and political explanations offered for multinational firms' location decisions in the United States, previous econometric studies on FDI have not sufficiently explored the potential impact of governmental institutions, particularly on the level of state governments' autonomy in which budgeting and financial decisions take place. This omission is surprising because a growing number of studies on American fiscal federalism have supported fiscal decentralization-that is, the devolution of the central government's fiscal responsibilities to lower levels of government, influencing economic development and growth (e.g., Oates, 1972;Shin, 2018Shin, , 2019Teune, 1982;Weingast, 1995).…”

“…Functional theory of American federalism suggests that the functional efficiency of government management increases when each level of government manages policies-that is, the federal government manages redistributive policies and state and local governments manage economic development policies-that can best perform (Peterson, 1995;Shin, 2019). Considering that states have traditionally made major efforts to increase economic performance by competing with one another, the economic performance of a state government can be measured, in part, by its capacity to attract more industries and businesses to its jurisdiction to raise employment rates and improve productivity.…”

Better service delivery, more satisfied citizens? The mediating effects of local government management capacity in South Korea

“…Other studies argue that decentralisation generally increases income inequality between regions, inflation and regional fiscal instability, thereby discouraging the delivery of public goods (Aznar et al, 2004; Manor, 1999; Prud'Homme, 1995). Despite these critiques, most theoretical studies in political science and economics suggest that decentralisation in developed countries is positively associated with public service provision because countries in the developed world have strong institutional checks against the overspending of subnational governments (Davoodi & Zou, 1998) and utilise functional accountability to effectively cope with major policy issues between the central and subnational governments (Shin, 2019).…”

“…The theory and practice of decentralisation have significantly influenced administrative reforms that specifically aim to further the growth of New Public Management (NPM), which seeks to establish market‐like management and outcome‐based performance in public organisations (Ghuman & Singh, 2013). In essence, the managerial capacities of local governments are characterised by greater levels of decentralisation, which is expected to increase the economic payoff by offering public goods that satisfy the various preferences of citizens, increasing the accountability and transparency of local governments, and allowing administrative innovation in public service production processes (Shin, 2019). Delegating substantial autonomy to local governments reinforces the organisational mission to achieve greater efficiency and effectiveness, driving street‐level administrators to actively represent their local clients.…”

“…Thus, the theory predicts that the two different units of government will operate effectively by taking comparative advantage of the functions they can best perform, thereby increasing the institutional efficiency of intergovernmental cooperation on policy areas that national and subnational governments are not fully equipped to manage effectively on their own (Anton, 1989; Peterson, 1995). In the case of lower levels of governments, since local governments are limited in their abilities to deal with such large‐scale public services as social and welfare programs, they are incentivised to create more efficient administrative organisations that involve fewer societal risks by securing administrative and financial assistance from central governments to manage high‐priority programs for dependent populations (Ahmad et al, 1991; Shin, 2019).…”