The marginal value of public funds in a federation
This paper establishes and provides a framework for quantifying the welfare effects of fiscal policies in an open economy, with an emphasis on state and local governments in a federalist system. To do this, we develop a model of fiscal policy when there are spillovers and mobility effects from changing taxes and expenditures among competing local jurisdictions. We then derive how mobility and spillovers influence the marginal value of public funds (Hendren, 2016). Because a federal planner internalizes the interjurisdictional externalities, the MVPF for a federal and local planner can diverge substantially. We provide guidance on the additional empirical components of the marginal value of public funds necessary to understand the welfare effects of policies in a federalist system.