Fiscal illusion,budget maximizers,and dynamic equilibrium

This paper extends previous work in grant induced fiscal illusion in two ways. While previous models have focused on the existence of rational comparative static equilibria in the presence of illusion, this work focuses on the dynamic process by which steady state equilibria can be achieved. Furthermore, endogeneity in grants is incorporated, which necessitates the use of a budget maximizing hypothesis. However, it is shown that a broader interpretation of the budget maximizing assumption is necessary in order for this characterization to make sense in a grantor/recipient framework.This paper was completed while the second author was on sabbatical leave at Auburn University in the Department of Agricultural Economics and Rural Sociology.