Past research on the allocation of federal resources to localities has failed to account for the interaction between federal and state governments. Here a sequential-move game of such interaction is developed, where state governments behave like political surrogates for the federal government...

Using VAR analysis on US data, we show that unanticipated fiscal expansions boost private consumption and business formation. Models with an extensive investment margin, i.e. endogenous firm and product entry, have difficulties explaining these two phenomena simultaneously. Considering different...