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This paper presents a growth model that can explain the coexistence of intellectual property rights and R&D subsidies as a response to the presence of both market and government failures. The framework can also generate the observed positive correlation between these two policy tools.

AbstractCan abundance of natural resources affect legislators' voting behaviour over federal tax policies? We construct a political economy model of a federalized economy with district heterogeneity in natural resource abundance. The model shows that representatives of natural resource‐rich districts are more (less) willing to vote in favour of federal tax increases (decreases). This occurs because resource‐rich districts are less responsive to federal tax changes due to the immobile nature of their natural resources. We test the model's predictions using data on roll‐call votes in the US House of Representatives over the major federal tax bills initiated during the period of 1945–2003, in conjunction with the presence of active giant oil fields in US congressional districts. Our identification strategy rests on plausibly exogenous giant oil field discoveries and exploitation and narrative‐based aggregate federal tax shocks that are exogenous to individual congressional districts and legislators. We find that: (i) resource‐rich congressional districts are less responsive to changes in federal taxes and (ii) representatives of resource‐rich congressional districts are more (less) supportive of federal tax increases (decreases), controlling for legislator, congressional district and state indicators. Our results indicate that resource richness is approximately half as dominant as the main determinant, namely party affiliation, in driving legislators' voting behaviour over federal tax policies.

Can abundance of natural resources affect legislators' voting behaviour over federal tax policies? We construct a political economy model of a federalized economy with district heterogeneity in natural resource abundance. The model shows that representatives of natural resource-rich districts are more (less) willing to vote in favour of federal tax increases (decreases). This occurs because resource-rich districts are less responsive to federal tax changes due to the immobile nature of their natural resources. We test the model's predictions using data on roll-call votes in the US House of Representatives over the major federal tax bills initiated during the period of 1945–2003, in conjunction with the presence of active giant oil fields in US congressional districts. Our identification strategy rests on plausibly exogenous giant oil field discoveries and exploitation and narrative-based aggregate federal tax shocks that are exogenous to individual congressional districts and legislators. We find that: (i) resource-rich congressional districts are less responsive to changes in federal taxes and (ii) representatives of resource-rich congressional districts are more (less) supportive of federal tax increases (decreases), controlling for legislator, congressional district and state indicators. Our results indicate that resource richness is approximately half as dominant as the main determinant, namely party affiliation, in driving legislators' voting behaviour over federal tax policies.

In economies with multi-level governments, why would a change in the fiscal rule of a government in one level lead to a fiscal response by a government in a different level? The literature focused primarily on the standard common-pool problem, while giving little attention to the potential role of complementarity or substitutability (CS) between the public goods supplied by the two governments. This paper fills this gap by focusing on the latter channel. First, we illustrate its potential key role in determining the sign of the vertical reaction through a generic model of vertical fiscal interactions. Second, we propose a novel strategy for identifying it, by considering an empirical design that confines the common-pool channel to specific locations. We implement this design through a quasi-natural experiment: the 1980 U.S. Crude Oil Windfall Act, which increased federal tax collections from sale of crude oil, thereby affecting the tax base of oil rich states specifically. This latter feature enables attributing the vertical fiscal reactions of the remaining states to the CS channel. Following this strategy, via a difference-in-differences approach, we decompose the sources of the vertical fiscal reactions arising from this federal tax change and find that those attributed to the CS channel: (i) account for approximately 38% of the overall vertical fiscal response; (ii) point at complementarity between state and federal public goods, most notably in transportation and welfare expenditures; (iii) are manifested primarily via changes in states' sales and income taxation.