Copycatting: Fiscal Policies of States and Their Neighbors

Abstract

This paper formalizes and tests the notion that state governments' expenditures depend on the spending of similarly situated states. We find that even after allowing for fixed state effects, year effects, and common random shocks between neighbors, as state government's level of per capita expenditure is positively and significantly affected by the expenditure levels of its neighbors. Ceteris paribus, a one dollar increase in a state's neighbors' expenditures increases its own expenditure by over 70 cents.