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We summarize the literature that uses the vector error-correction model approach to analyze the dynamics of the municipal fiscal adjustment. The international comparison between samples collected from entire countries and specific regions reveals interesting similarities, but also remarkable differences. The main similarities are the fulfillment of the intertemporal budget constraint, the volatility of the budgetary components, and the importance of the intergovernmental transfers as an adjustment instrument. The most remarkable difference is the preponderant role of the own revenues in the USA, probably reflecting the larger fiscal autonomy of US municipalities. In most cases, the large municipalities seem to be more dependent on grants than their small counterparts, although this pattern is broken in Japan. Finally, partial evidence supporting the existence of moral hazard problems and the flypaper effect is provided.

In the context of China without a median voter system, this study examines whether the “flypaper effect”, an unconditional lump-sum grant from the upper governments to the county governments increases spending in a greater proportion than an equivalent rise in local income, holds true in China. Using China’s county-level education data during 2007, the models have been estimated using a spatial econometric technique that accounts for spatial interaction behavior on public education expenditure across local governments. We find that, in the presence of spatial interdependence, there is no evidence of a “flypaper effect” when different spatial weighting schemes and the endogeneity problem of education grants are accounted for. Rather, the “anti-flypaper effect” is found. Important policy implications are drawn for China’s fiscal decentralization reform.

Der Artikel untersucht die Frage, welche Faktoren die Ausgaben der 26 Schweizer Kantone beeinflussen. Wahrend die Frage bereits mehrfach mit statistischen Ansatzen untersucht wurde, hat die vorliegende Studie einen alternativen Fokus, indem sie eine konfigurative Perspektive einnimmt. Ausgangspunkt sind die Ergebnisse der Studie von Vatter und Freitag von 2002, welche mit aktualisierten Daten der Jahre 2000 bis 2006 in einer Fuzzy Set QCA auf ihre kombinierte Wirkungsweise hin untersucht werden. Die Resultate streichen die zentrale Bedeutung von Transferzahlungen hervor und stutzen so die These des Flypaper Effect aus der okonomischen Theorie. The government expenditures of the Swiss Cantons. A Fuzzy Set QCA The paper investigates the factors influencing the 26 Swiss Cantons' government expenditures. While the question has been subject to various statistical analyses, the present study has an alternative focus by adopting a configurative perspective. We take the findings of the 2002-study by Vatter and Freitag, as our point of departure and re-analyse their significant variables with regard to their combined impact using updated data from 2000 to 2006 and employing Fuzzy Set QCA. The results underline the important effect of monetary transfers from the federation thus corroborating the Flypaper Effect thesis from Economic Theory.

This article uses the flypaper effect theory to analyze the asymmetric effect of revenue-sharing transfers on spending by state governments in Mexico. Studies in the field commonly assume that the expenditure response to a marginal change in a transfer is the same across the board, but the characteristics of each local government can be so different that the assumption seems unrealistic. This article uses a panel of 31 Mexican states to derive effect measures for each entity. The analysis shows that differences in the spending outcomes exist and that there is a connection between the magnitude of the response and the income level of the recipient. If the goal is to attain a sustainable fiscal decentralization, it would be a mistake to assume that all states behave in the same way. Este articulo utiliza la teoria del “papel matamoscas” para analizar las asimetrias en el impacto de las transferencias no condicionadas en el gasto de los gobiernos estatales en Mexico. Los estudios en esta area usualmente asumen que la respuesta del gasto a un cambio marginal en la transferencia es el mismo en todos los casos. Sin embargo, las caracteristicas de los gobiernos locales pueden ser tan divergentes que este supuesto parece ser poco realista. El articulo utiliza una muestra de 31 estados mexicanos para medir el impacto de las transferencias en el gasto de cada entidad. El analisis muestra que existen diferencias entre los estados y que existe una conexion entre la magnitud del impacto de la transferencia y el nivel de ingreso de quien la recibe. Si la intencion es lograr una descentralizacion fiscal sustentable, seria un error asumir que todos los estados se comportan de la misma manera.

We investigate the phenomenon of flypaper effect and its relationship with the local tax effort by using a panel data comprising approximately 48 percent of the Mexican municipalities. Our estimations based on the fixed effect and difference GMM estimators confirm the existence of flypaper effect. Moreover, we find evidence to suggest that the richer municipalities are likely to experience substitution effect, i.e., the lower levels of tax effort. We also find that the magnitude of the flypaper effect is a decreasing function of the economic wellbeing of municipalities. This calls for an overhaul of the allocation mechanism of unconditional grants to the Mexican municipalities.

This paper analyzes the impact on firm behavior of the Homeland Investment Act of 2004, which provided a one-time tax holiday for the repatriation of foreign earnings by U.S. multinationals. The analysis controls for endogeneity and omitted variable bias by using instruments that identify the firms likely to receive the largest tax benefits from the holiday. Repatriations did not lead to an increase in domestic investment, employment or R&D -- even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained. Instead, a $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders. These results suggest that the domestic operations of U.S. multinationals were not financially constrained and that these firms were reasonably well-governed. The results have important implications for understanding the impact of U.S. corporate tax policy on multinational firms.

We examine the flow of federal grants-in-aid from the U.S. Environmental Protection Agency (EPA) to the states. We simultaneously model two dependent variables (the flow of EPA funds, and state environmental and natural resource budgets) to identify the independent roles of state political institutions, political preferences, economic and demographic characteristics, and the task environment. Our central focus, though, is on the relationship between grants and state spending after taking into account those direct effects. We examine the evidence for positive association (a flypaper effect) and negative association (crowding out). We show the different roles for political institutions, political preferences, demographic and economic characteristics, and the task environment in each spending context. Most importantly, we find evidence for a flypaper effect between federal funds and state spending: Federal spending and state spending are positively correlated after accounting for the contribution of the unique factors. © 2010 by the Association for Public Policy Analysis and Management.

While South Africa operates a relatively decentralised governance and administrative structure, an important feature of the country's intergovernmental fiscal relations system is the gap that exists between the expenditure responsibilities of sub-national authorities and their assigned revenue bases. The resulting vertical fiscal imbalance is mainly addressed via significant intergovernmental transfers to provinces and local governments. This factor presents strong a priori grounds for assuming that in the South African context, the heavy dependence of many local governments on intergovernmental transfers may generate fiscal illusion. Despite this, there have not been many empirical studies of fiscal illusion in South Africa's intergovernmental transfer system. This paper extends existing literature on fiscal illusion by using the fiscal year 2005/06 financial and expenditure data from 237 local government authorities in South Africa to evaluate the flypaper variant of the fiscal illusion hypothesis. Empirical results indicate that the marginal effects of municipal own-source revenues on local expenditure exceed those of intergovernmental transfers. No statistical evidence in support of the flypaper hypothesis within the context of municipal expenditures in South Africa is found.

Using data for Wisconsin cities and villages the effects of grants in aid from state government on 10 categories of municipal expenditures are examined. We build on the traditional grants in aid public finance literature by looking for evidence of the flypaper effect. By focusing on the Wisconsin state shared revenues program, a pure grant of considerable size for many Wisconsin municipalities, we offer a clean test of the flypaper effect. We find a positive flypaper effect on 8 of the 10 categorical expenditures. We also find the impact of unconditional grants on categorical expenditures is stronger on nonessential “luxury” goods (e.g., parks and recreation, culture, and educational services) than on essential “normal” municipal goods (e.g., police and fire protection).

Building on the literature on public finance, I seek to advance our understanding of variations in government size by exploring the impact of official development assistance on fiscal policy. I hypothesize that foreign aid operates in accordance with the “flypaper effect,” systematically generating incentives and opportunities for the expansion of government spending. Results from a time-series cross-sectional regression analysis of growth in government spending over the 1970–99 time period are consistent with the hypothesis. For middle- and lower-income nations, aid represents an important determinant of government expansion. Looking at the tax and revenue side of the equation, however, reveals a more perverse pattern of response: aid promotes not only increased spending but also reduced revenue generation. The results have important implications from both a theoretical and policy perspective. Inter alia they point to the potentially self-defeating nature of efforts to promote market-oriented programs of state retrenchment via development assistance as well as to the importance of incorporating international transfers into future research on government spending.

The flypaper effect refers to the phenomenon whereby expenditure stimulus from unconditional grants exceeds that from an equivalent increase in income. The flypaper effect has been described as “money sticks where it hits.” The present study empirically tests the flypaper effect for the Indian economy. The study also tests the asymmetry hypothesis that looks at the impact of retrenchment in grants. Results obtained in the present study show the flypaper effect to be vindicated. We find that both capital and revenue expenditures receive a greater stimulus from grants than would an increase in income. Results show that in the prereform period both revenue and capital expenditures are maintained during periods of grant cuts. However, in the postreform period it is only expenditures on revenue accounts that are maintained in periods of grant reduction. We also find that during periods of grant reduction, state governments maintain their expenditure programs by raising their own tax revenue. This suggests that grants from the center have had a disincentive effect and could be a reason that state governments have not exploited their tax potential to the fullest. By bringing to the fore the disincentive effect of grants we wish to emphasize the urgency of taking a closer look at restructuring and redesigning our system of intergovernmental transfers.

DAVID L. HOBSON [*] The present study tests the theory that states can impact the size of the grants they receive (per capita) from the federal government by becoming pivotal players in the federal electoral (primary/caucus) process. That is, by rearranging their presidential primary and caucus dates, states can play an important role in determining the field of candidates for the two major political parties in the United States. States are then likely to be rewarded within the budgetary process at the federal level, which begins with the executive branch. Results from a simultaneous equation system suggest that the impact of the average movement of primaries/caucuses in the sample period (10.36 days closer to 1 January) results in an increase of federal grants of $362 million to $1.2 billion (over a two-year period) for the average state. These results are consistent with the current pattern in the American political process of more front-ended presidential primaries and caucuses. (JEL D72, H11, H72, H77) I. INTRODUCTION The responsiveness of state and local government spending in the United States to changes in federal government grants to state/local governments has been the subject of extensive research in the economics literature. There have also been recent studies that examine the political aspects of intergovernmental grants within the legislative process. These studies have generally pointed out that (1) there is a positive relationship between spending by junior governments and the grants they receive from senior governments (i.e., the so-called flypaper effect), and (2) there are predictable legislative and interest group determinants of intergovernmental grants within the legislative process (see Gamkhar and Oates [1996]; Wyckoff [1991]; Yinger and Ladd [1989]; Holsey [1993]; Breton and Fraschini [1992]; Wallis [1991]; Grossman [1994]). From a public finance perspective, some studies (see Ladd [1990 and 1991]) also examine the determinants of state aid to cities and localities, and others look at the impact of fed eral assistance on local services (Inman, 1988). Recently, Mixon and Ladner (1998) extended the intergovernmental grants research above by pointing out an ancillary consequence of the intergovernmental grant process by suggesting that the number of candidates seeking state legislative offices rises with the value of grants from the federal government. This study is built on the rent-seeking theory developed within the public choice literature by Tullock (1967), Krueger (1974), and Posner (1975). In this tradition, the present study proposes to test the theory that states can impact the size of the grants they receive (per capita) by becoming pivotal players in the federal electoral process. That is, by rearranging their presidential primary and caucus calendars, states can have a disproportionate impact on the process by which presidential candidates from the two major political parties are selected. By attempting to effect such a disproportionate impact, states are then likely to be rewarded within the budge tary process at the federal level, which in modem times has begun in the executive branch of government (i.e., the president and the administration). From this perspective, the current study extends a line of previous work by Wright (1974), Anderson and Tollison (1991), and Wallis (1991, 1998). Below, we provide a brief review of recent studies on intergovernmental grants. Next we offer an econometric model of our hypothesis, followed by a discussion of the statistical results. Finally, we present some concluding comments. II. PREVIOUS LITERATURE: A REVIEW Many studies to date have suggested that a "flypaper effect" exists within the intergovernmental grant process, wherein state and local government expenditures increase as federal governmental grants to them increase. Recently, Gamkhar and Oates (1996) produced results, using aggregate time series data on state and local government spending, which point out that state and local government spending falls in response to cuts in intergovernmental grants (from the federal government). …

Work in the US and Canada has found the flypaper effect to be evident at the national as well as the sub-national government level. This paper uses the methodology developed by Robert R. Logan (1986) to examine how the payment of inter-governmental grants has affected government expenditure in Australia. The analysis is of both the recipient and payee governments.

A model of government budgeting is developed in which lobbying by interest groups can divert the allocation of funds away from the one preferred by the median voter. The model is applied to state and local governments to show that the “flypaper effect”–the tendency for lump-sum grants to increase public expenditures by more than an equivalent increase in the community's pretax income–can be explained without the customary assumption of voter fiscal illusion. Furthermore, the model predicts variation in the extent of the flypaper effect among expenditure categories, as found in previous empirical studies.