Welfare, innovation capacity, and economic performance: Evidence from American federalism

Despite years of increased federal welfare spending, it is unclear how federal financial investments in welfare areas influence state economies. Based on the theory of functional federalism, this paper examines the impact of federal welfare spending on state economic performance. Employing error correction models, this research finds that state economic growth and volatility are directly observed by the long-term impact of welfare spending. The results also show that increased federal welfare spending boosts state economic performance indirectly, by motivating states to generate higher innovation capacity, especially, in knowledge-based economic development programs. This research extends our understanding of the determinants of state economic performance by addressing intergovernmental redistributive transfers, and state government’s innovation capacity