Essays in subnational fiscal policy and public goods

This dissertation consists of three essays. The first two address the response of state fiscal policy to unexpected shocks to the budget and the third considers the contribution behavior of participants in a public goods game with varying ratios of public to private goods. Chapter 1 is motivated by the recent swings in fiscal circumstances at the state level, which have refocused attention on the costs and benefits of balanced budget rules. The chapter investigates the costs of state adjustment to fiscal shocks by identifying the types of taxes that states use when balanced budget rules bind. The results show that states rely disproportionately on corporate income and selective sales taxes to correct unexpected deficits. A plausible explanation for the use of these taxes is that increasing them is perceived as politically safe, even in economic downturns. However, continued reliance on these taxes to balance state budgets may have substantial efficiency costs.;Chapter 2 examines the assumption, implicit in the analysis of the first chapter, that aggregate state policy does not affect output in the short term. While this assumption is quite common in the literature, and tends to complement the assumption that the institutional constraints on state policy are costless, it is rarely examined empirically. Using a vector autoregression approach with a time series of aggregate state data on revenues, expenditures, and output, the chapter finds that state policy does not in fact change output in the short term.;Chapter 3 follows experimental subjects' behavior in a public goods setting with an innovative feature, that of multiple public and private goods in a single choice set. This institutional structure is explored in a variety of permutations, including homogeneous and heterogeneous returns and constrained and unconstrained allocations. The overwhelming conclusion is that behavior is sensitive to multiple options; sessions with multiple public goods reveal higher contributions to the public sector than those with multiple private goods. However, the effect is confined to sessions where the multiple options offer similar returns. A possible explanation for this behavior lies in the interaction of confusion and the minimization of regret.