States’ responses to shortfalls and windfalls

The ability of voters to monitor government officials is complicated by the large changes in government spending caused by the business cycle. Voters may be uncertain about the cumulative effect of changes in spending that occur over several years, and thus budget allocations may be different from voters’ ideal. For the years 1989 through 2006, we examine states’ responses to revenue shocks, which are changes in revenues that are unrelated to fiscal policies. We find that government spending increases in responses to positive shocks but remains constant in response to negative shocks. Further, this asymmetry leads to growth in government.