This paper explores the role of local demographic compositions in generating interjurisdictional spillovers that lead to fiscal burdens for local governments, and it asks to what extent intergovernmental transfers compensate for these burdens. We begin by constructing a conceptual model linking demographics to spillovers and local fiscal burdens, and then utilize California data on county budgets to test the implications of the model. By focusing on overall government budgets and the total flows of intergovernmental transfers, the empirical strategy circumvents problems arising from the possible local fungibility of grants. The empirical results are consistent with the notion that higher level governments are compensating local governments in California for the fiscal burdens arising from differences in demographic compositions.

Thomas MaCurdy
Stanford University

Thomas Nechyba
Stanford University

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