Observable Heterogeneity and the Demand for Local Public Spending

This paper demonstrates the effect of omitting quasi-governmental expenditures when estimating the demand for local public services. The data used are public works expenditures and fire protection expenditures from 179 New Jersey municipalities in 1980. I conclude that the common practice in the literature of ignoring structural aspects of intergovernmental relations is likely to lead to significant biases when estimating demand equations. Economists researching the demand for local government spending need to account for the administrative system generating their data when undertaking empirical analyses.