The Assignment of Fiscal Responsibility in a Federal State: An Empirical Assessment

This paper uses the assignments of fiscal responsibility in the U.S. public primary and secondary school finance systems to test the key propositions of the optimal federal design literature. It is found that: (1) variations in the observed assignments of fiscal responsibility are consistent with those predicted by the conventional literature; and (2), the degree of interjurisdictional competition present in these systems influences educational expenditure. The latter finding is particularly interesting because it supports the conjecture of the Leviathan theorists that systematic tendencies to overspend—if any—can be combatted by building more competition into federal systems.