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In this applied research study we examine the changing fiscal relationship between state and local governments. Our research question is simple: Do local governments treat state aid during periods of stability and instability in a systematic manner? Using data on Wisconsin's unconditional shared revenues program from 1990 to 2000, we find evidence of a flypaper effect and that the relationship tends to be asymmetrical. The manner in which local governments treat intergovernmental aid is different between periods of increases and decreases in aid. Specifically, using a model that allows for the identification of structure shifts we find evidence of fiscal replacement. In addition, we find that changes in aid impact types of spending differently. When aid is reduced, policymakers appear to be less inclined to cut police and fire services than they are to cut services such as parks and recreation. Copyright 2006, Oxford University Press.

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).

This article examines decentralization in the state of Maharashtra in India, especially with respect to the functioning of its urban local governments. Using panel data, the article specifically investigates the flypaper effect of grants from the state government to urban local bodies. It also addresses the asymmetry hypothesis, which states that subnational governments respond differently to a reduction in grants than to an increase. Our results demonstrate the presence of the flypaper effect, but evidence regarding the asymmetric response to a reduction in grants is ambiguous. Copyright 2005, Oxford University Press.

One of the federal government's main elementary and secondary education programs is Title 1, which allocates money for compensatory education to school districts based on child poverty. I use sharp changes in per-pupil grant amounts surrounding the release of decennial census data to identify effects of Title I on state and local education revenue, and how much the program ultimately increases spending by recipient school districts. I find that state and local revenue efforts initially are unaffected by Title I changes, but that local governments substantially and significantly crowd out changes in Title I within in a 3-year period. (C) 2003 Elsevier B.V. All rights reserved.

Local governance arrangements shape the incentives of local actors, which may in turn influence fiscal choices. By emphasizing the role of local government institutions in local fiscal choices, we seek to bridge between median voter and Leviathan models prevalent in the literature. We then offer some preliminary evidence to support this explanation by empirically testing several propositions regarding the flypaper effect in intergovernmental grants. One limitation of the median voter model is that the model does not consider political institutions and their influences on government expenditures. In this study, we attempt to capture the influence of political dynamics in determining public expenditures by considering institutional variables. Test results show that the political institutional variables could be one of the explanation variables for the flypaper effect.

Intergovernmental transfers can affect the level of local expenditures. Empirical studies indicate that lump sum grants have more stimulative effect on the level of public expenditures than local private income, which is termed “the flypaper effect.” This study examines whether grants cause the flypaper effect in the face of linear budget constraint in Turkey. Our findings confirm that the grants did cause the flypaper effect. Then it is suggested that the bureaucratic model could explain the flypaper effect. Unlike previous research, this study investigates whether the flypaper effect is uniform across local authorities. The findings indicate that population and grant increase rate influence the flypaper effect.

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.

In Italy, public expenditure reduction is achieved through a revision of social security and health care programs. In particular, public health expenditure control has been implemented through a reform that imposes more stringent budget rules to local governments and a considerable reduction in grants-in-aid from the central government. This paper investigates empirically whether the response to this decrease in categorical lump-sum grants from the central to local governments results in an asymmetric response to intergovernmental grants. Hard budget and soft budget constraint hypotheses are estimated by using a sample of cross-sectional and time observations covering the 20 Italian regions over the period 1989–1993. The main finding is the existence of a standard and a super flypaper effect in both models. The introduction of the soft-budget constraint hypothesis results in a stronger effect of grants and a lower response of own resources which shows that local governments prefer to incur some deficit instead of reducing health care expenditure.

One of the implementations of autonomy policy is fiscal decentralization. The State gives chance to every local government for improving its fiscal ability. Original Local Government Revenue (PAD) is fiscal potency owned local government to improve local government independence to promote welfare to society. To accelerate fiscal independence of local government equally, the central government sends transfer funds in the form of General Allocation Funds (DAU) which aims to comply local government expenditure that has not fulfilled. However, problems faced is local government expenditure management still much more affected by DAU rather than PAD. It indicates that local government still depends on central government to comply expenditure called flypaper effect. This research aims to analyze the effect of PAD and DAU on local government expenditure by identifying whether occurs flypaper on provincial government in Indonesia. The method used in this research is analysis regression of panel data with Generalized Least Square (GLS). Data used is panel data from 34 provinces in Indonesia between 2008-2017. Based on results estimation, PAD and DAU positively and significantly affect local government expenditure. However, the DAU more affects local government expenditure compared with PAD. This exhibits that flypaper effect phenomenon occurred on provincial government in Indonesia which local government expenditure response more affected by DAU than PAD. It is happening due to the provincial government still relies on central government to comply its expenditure illustrated with high DAU transfers. This research concludes that decentralization policy in Indonesia is not effective yet. Thus, the government needs to adjust decentralization policy in order to improve regional fiscal independence.

This paper provides a simple political agency model to explain the effect of political alignment between different tiers of government on intergovernmental grants and election outcomes. Key features of the model are: (i) rational voters interpret public good provision as a signal of incumbent competence, and (ii) realistically, grants are unobservable to voters. In this setting, the national government will use the grant as an instrument to manipulate the public good signal for the benefit of aligned local incumbents and challengers. Then, aligned municipalities receive more grants, with this effect being stronger before elections, and the probability that the aligned local incumbent is re-elected is higher. These predictions are tested using a regression discontinuity design on a new data-set on Italian municipalities. At a second empirical stage, the national grant to municipalities is instrumented with an alignment indicator, allowing estimation of a flypaper effect for Italian municipalities.

Resumo Este trabalho investiga a existência de uma relação positiva entre receita municipal per capita - que inclui arrecadação local de impostos e transferências intergovernamentais incondicionais - e o recebimento de recursos através do Sistema Único de Saúde (SUS) pelos municípios brasileiros. Considerando o aspecto redistributivo, essa relação não seria desejável, já que municípios com maior capacidade de financiamento receberiam mais repasses por habitante destinados à saúde. Foram estimados modelos de painel com efeitos fixos, utilizando dados dos municípios brasileiros no período 2002-2010, obtidos em sua maioria através do Departamento de Informações do SUS (DATASUS) e do Sistema de Informações sobre Orçamentos Públicos em Saúde (SIOPS). Os resultados apontam que a receita municipal exerce, de fato, um impacto positivo inesperado sobre o recebimento de transferências do SUS pela modalidade fundo a fundo. Também foram identificados indícios de que pode haver fatores políticos influenciando o recebimento de recursos do SUS. Abstract This paper investigates the existence of a positive relationship between municipal per capita revenues – which includes local taxes and unconditional lump sum federal grant receipts - and federal grants received through the Unified Health System (Sistema Único de Saúde – SUS) by the brazilian municipalities. Considering the redistributive aspect, this relationship may not be socially desirable, since richer municipalities would benefit from greater grant receipts destined to health care. Fixed effect panel data models were estimated, using municipal information from 2002 to 2010. Data was mostly obtained from Departamento de Informações do SUS (DATASUS) and Sistema de Informações sobre Orçamentos Públicos em Saúde (SIOPS), both from the Brazilian Ministry of Health. Our results show that municipal revenue has indeed a positive and unexpected impact on federal grant receipts destined to health care. We also identified some evidence that there may be political factors influencing the federal grants received through the SUS.

Numerous empirical analyses find that central government lump sum transfers to local governments increase local expenditure by more than increases in local income. In this study,whether central grants(transfers) cause the flypaper effect in Turkey is examined for the 2006-2014 period using a Panel Regression model. The results indicate that the central government lump sum transfers cause the flypaper effect and also local incomes influnce the local expenditure but not the same as lump sum transfers Birçok ampirik çalışma merkezi yönetimlerin yerel yönetimlere koşulsuz (götürü) transferlerinin yerel harcamaları yerel gelire oranla daha fazla arttırdığı sonucuna ulaşmıştır. Bu çalışmada Türkiye'de merkezi hibelerin(transferlerin) sinek kağıdı etkisi yaratıp yaratmadığı, 20062014 dönemi için panel regresyon modeli ile test edilmiştir. Sonuçlar merkezi yönetim götürü transferlerinin sinek kağıdı etkisine yol açtığını ve ayrıca yerel gelirlerin götürü transferler kadar olmasa da yerel harcamaları etkilediğini göstermiştir.

Despite massive large-scale asset purchases (LSAPs) by central banks around the world since the global financial crisis, there is a lack of empirical evidence on whether and how these programs affect the real economy. Using rich borrower-linked mortgage-market data, we document that there is a “flypaper effect” of LSAPs, where the transmission of unconventional monetary policy to interest rates and (more importantly) origination volumes depends crucially on the assets purchased and degree of segmentation in the market. For example, QE1, which involved significant purchases of GSE-guaranteed mortgages, increased GSE-eligible mortgage originations significantly more than the origination of GSE-ineligible mortgages. In contrast, QE2's focus on purchasing Treasuries did not have such differential effects. We find that the Fed's purchase of MBS (rather than exclusively Treasuries) during QE1 resulted in an additional $600 billion of refinancing, substantially reducing interest payments for refinancing households, leading to a boom in equity extraction, and increasing consumption by an additional $76 billion. This de facto allocation of credit across mortgage market segments, combined with sharp bunching around GSE eligibility cutoffs, establishes an important complementarity between monetary policy and macroprudential housing policy. Our counterfactual simulations estimate that relaxing GSE eligibility requirements would have significantly increased refinancing activity in response to QE1, including a 20% increase in equity extraction by households. Overall, our results imply that central banks could most effectively provide unconventional monetary stimulus by supporting the origination of debt that would not be originated otherwise.

This paper provides a simple political agency model to explain the effect of political alignment between different tiers of government on intergovernmental grants and election outcomes. Key features of the model are: (i) rational voters interpret public good provision as a signal of incumbent competence, and (ii) realistically, grants are unobservable to voters. In this setting, the national government will use the grant as an instrument to manipulate the public good signal for the benefit of aligned local incumbents and challengers. Then, aligned municipalities receive more grants, with this effect being stronger before elections, and the probability that the aligned local incumbent is re-elected is higher. These predictions are tested using a regression discontinuity design on a new data-set on Italian municipalities. At a second empirical stage, the national grant to municipalities is instrumented with an alignment indicator, allowing estimation of a flypaper effect for Italian municipalities.

This paper investigates the effects of fiscal equalization grants on total expenditure and disaggregated expenditures by exploiting two different formula-based exogenous variations in grants. Examining the institutional settings of the Japanese fiscal equalization scheme and estimating local average grant effects with a regression kink design and an instrumental variable approach, I demonstrate that there exist heterogeneous grant effects for two groups of municipalities with different fiscal conditions. That is, estimated grant effects on total expenditure are approximately one-to-one for municipalities around the threshold of grant eligibility, but much more than one-to-one for municipalities that are heavily dependent on fiscal equalization grants. In addition, grant effects on disaggregated expenditures are dispersed across different expenditure items in the former type of municipality but concentrated on construction expenditures in the latter type. I then discuss that the observed grant effect heterogeneity is a consequence of the institutional settings of the Japanese fiscal equalization scheme.

This chapter presents a discussion on the role of grants-in-aid in a federalist system of governments. Grants-in-aid are unnecessary in any model as long as the policy environment is truly first-best, and a perfect correspondence of jurisdictions exists for all allocation problems. The national government satisfies its interpersonal equity conditions with lump-sum taxes and transfers among individuals (and firms, with decreasing cost production) exactly as in the single-government model of the public sector. Similarly, all governments—whether national or “local”—interact only with the individual consumers and firms within their jurisdictions while correcting for resource misallocations. That actual grants-in-aid bear little relationship to theoretical design criteria is hardly surprising, because the theory is so difficult to apply in this instance. In terms of the alternative model, distributional norms based on social welfare functions can never be more than suggestive to the policymaker. In terms of imperfect correspondences for externality-generating public services, varying matching formulas across “local” governments on the basis of marginal external benefit or harm may be unconstitutional. Faced with these realities, economists have resorted to developing practical design criteria that are at least roughly consistent with the underlying theory.

Simple models of local government behavior predict equal effects of private income and unconditional federal grants on local government expenditures. Numerous empirical analyses, however, find that the effect of grants is larger than the income effect. We argue that this flypaper effect may be a result of weak political leaderships in multi–issue and multi–party decision–making environments. In multi–issue institutions, a strong political leadership may reduce inefficiency due to interest group influence and inter–party bargaining in the local council. Utilizing data for Norwegian local governments in the 1930s, we find that political strength reduces the size of the flypaper effect. When the local council consists of only one political party, we cannot reject absence of a flypaper effect, while the flypaper effect is large in fragmented local councils.

An analysis of the flypapereffect under different institutionalcontexts is carried out for Colombia,where during the decentralizationprocess different sub-national fiscalstructures with different degrees ofautonomy to manage transfers,expenditures, taxes and debt havecoexisted. The analysis is carried outby using panel data models andalternative functional forms. Theresults show that the flypaper effectis observed when sub-national entitiesare highly dependent onintergovernmental transfers. Ananalysis of asymmetries in response totransfers shows that sub-nationalauthorities try to cover the reductionin transfers when the percentage oftransfers into the total currentrevenue is high.

Are public transfers targeted toward children neutralised by the household, as the theory of altruism implies, or is there an intrahousehold ‘flypaper effect’ whereby such transfers ‘stick’ to the child? This paper studies the impact of a school feeding programme on child caloric intake in the Philippines using a quasi-experimental methodology. The empirical results confirm an intrahousehold flypaper effect; indeed, they indicate virtually no intrahousehold reallocation of calories in response to the feeding programme. In poorer households, however, children’s gains from the programme appear to be ‘taxed’ more heavily.

How states and localities react to federal airport grant cuts is a question of increasing importance, especially in light of recent congressional funding reauthorization debates. This study finds that states and localities behave in the way public finance theory predicts. The magnitude of an airport spending change is the same (but in opposite directions) for a cut and an increase in airport grants. Thus, the flypaper effect operates in both directions. Spillovers arising from airport spending are also considered. With the hub and spoke structure of the U.S. air transportation system, a spending increase on airports experiencing major time delays confers spillover benefits on individuals in other states in the form of travel time savings from decreased congestion. These spillovers are reciprocal. There is significant evidence of such interdependencies, and an individual state raises airport spending by between 50 and 60 cents when other states increase airport spending by 1 dollar.

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.

Contrary to simple theoretical predictions, existing evidence suggests that federal grants do not crowd out state government spending. A legislative bargaining model with endogenous grants documents a positive correlation between grant receipts and preferences for public goods; this correlation has likely biased existing work against measuring crowd-out. To correct for such endogeneity, the model motivates instruments based on the political power of state congressional delegations. Exploiting this exogenous variation in grants, the instrumental variables estimator reports crowd-out that is statistically and economically significant. This endogeneity may explain the flypaper effect, a nonequivalence between grant receipts and private income. (JEL D70, H40, H77)

Recent empirical work on US governments indicates an asymmetry in the flypaper effect: the elasticity of public spending with respect to changes in grants differs significantly for positive and negative changes. Using a panel of data on Flemish municipalities covering the period 1989–1996, we also find clear evidence of asymmetrical reactions. More precisely, the results suggest the presence of a fiscal replacement type of asymmetry: when grants grow, municipalities spend most of the additional revenue. However, when grants fall, spending is unaffected and municipalities compensate the loss through additional taxation.

The authors estimate vector autoregressions for three categories of state government expenditure: education, highways, and welfare. Each regression contains state expenditure on that category, federal aid to the state in that category, total federal aid to the state, state general revenue, and personal income. The authors calculate impulse response functions for these vector autoregressions to analyze changes in aid and expenditure over time. The authors find that deviations in expenditure and category-specific aid have large and long-lasting effects on future expenditure. Category-specific aid has a much stronger effect than aid, revenue, or income, suggesting a flypaper effect in which aid is spent disproportionately in the category in which it is granted. This effect persists for up to 5 years, suggesting that there are structural dynamic links between category-specific aid and expenditure by states on those categories.

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). …

Contrary to simple theoretical predictions, previous empirical research has found that state government public spending is increased far more, often dollar-for-dollar, by federal grant receipts than by equivalent increases in constituent private income. This anomaly has come to be known as the flypaper effect. First, a legislative bargaining model developed in this paper provides a critique of this empirical finding. The model demonstrates a positive correlation between constituent preferences for public goods and intergovernmental grant receipts, and this correlation has likely biased the existing literature towards finding a flypaper effect. The model also motivates using measures of the political power of state congressional delegations as an instrument for grant receipts. Second, after correcting for the endogeneity of grant receipts, the results demonstrate that constituent private income and grants have similar effects on public spending.

In New York state, there is a perception that the fiscally dependent status of the five large city school districts creates an impediment to the attainment of standards. I attempt to assess the impact of fiscal dependence on educational spending. The results suggest that levels of spending may be systematically lower in the fiscally dependent districts. There is, however, little evidence that the general purpose governments to which these districts are fiscally dependent “steal” a disproportionate share of state aid for education. I conclude by evaluating policies that could mitigate any detrimental impact that fiscal dependence might have. This evaluation leads me to the conclusion that, even if spending levels are inadequate, elimination of fiscal dependency may not be the best policy for addressing this problem. Instead, policy makers may want to consider governance changes that would better align responsibilities for allocating revenues to the schools and for governing the schools.

It is well established that lump-sum public grants boost local government spending more than an equivalent increase in private income, the flypaper effect. One shortcoming of the related literature is that it presumes all communities have an identical propensity to consume from an intergovernmental grant. This paper is one attempt to allow for a heterogeneous response. The working conjecture is that government expenditure on administrative overhead is a gauge of voter control over fiscal decisions. High overhead spending implies a lower provision of public services and a stronger role for revenue-maximizing forces in the budget-setting process. As such, the flypaper effect should be more marked in high overhead communities. An overhead index is applied to a sample of Pennsylvania communities in the Philadelphia metropolitan area. It is difficult to understand these governments' spending propensities from various windfall revenues without the help of the overhead index, supportive evidence for this approach. Because overhead data is widely available, the technique here can be used to address important policy questions such as predicting variations in state government responses to the recently created lump-sum welfare grants.

The flypaper effect literature dates back three decades. It is overwhelmingly neo- classical in approach, attempting to improve the median voter demand model and/or temper it with public choice supply-side perspectives. Whilst this approach provided valuable early substantial analytical insights, more recent papers seem to have contributed only marginally to an understanding of the flypaper effect, if indeed it exists at all. Hence, as well as providing a long-overdue comprehensive review of the literature on the flypaper effect, this paper identifies more productive avenues for further research.

Ao contrário do que seria esperado em uma previsão teórica simples, diversos trabalhos empíricos têm verificado que um aumento das transferências intergovernamentais gera um gasto público maior do que uma elevação equivalente na renda dos indivíduos. Uma das hipóteses para este fenômeno, conhecido com o flypaper effect, é de que a burocracia se apropria das transferências por meio de salários, o que é condizente com o pressuposto de que os burocratas estariam interessados em maximizar seu próprio orçamento, e se aproveitariam da assimetria de informação e poder em relação ao eleitorado. Este trabalho tem o objetivo de investigar se tal pressuposto se comprova empiricamente para os municípios brasileiros, verificando a relação entre as transferências incondicionais e o diferencial de salários entre as esferas pública e privada. Para tanto, utilizamos um painel de municípios que cobre o período de 2002 a 2011 e um modelo econométrico de variável instrumental. Para medir o diferencial de salário, foi usada a Decomposição de Oaxaca, que separa o efeito das características individuais daquele que seria gerado pela apropriação. Os resultados apontam para a ocorrência de apropriação, considerando não só o setor público e privado formal como um todo, mas também seus subsetores. Despite what would be expected by a simple theoretical prediction, several empiric studies have verified that an increase of the grants-in-aid leads to greater public spending in comparison to an equivalent raise in the citizen’s income. One of the hypotheses for this phenomenon, known as the flypaper effect, is that the bureaucracy appropriates of grants through wages, which is consistent with the assumption raised by the literature that bureaucrats would be interested in maximizing their own budget and would take advantage of the information and power asymmetries compared to the electorate. This paper aims to investigate whether this assumption is demonstrated empirically for Brazilian municipalities, verifying the relationship between transfers and the wage differential between the public and private spheres. Therefore, we use municipalities’ data panel from 2002 to 2011 and an instrumental variables model. The wage differential is obtained through the Oaxaca Decomposition, which isolates the effect of individual characteristics in wages from the resource appropriation result. The results show that there are evidences of appropriation, not only when public and private sectors are compared as a whole, but also when subsectors are considered.

In a Regression Kink (RK) design with a finite sample, a confounding smooth nonlinear relationship between an assignment variable and an outcome variable around a threshold can be spuriously picked up as a kink and result in a biased estimate. In order to investigate how well RK designs handle such confounding nonlinearity, I firstly implement Monte Carlo simulations and then study the effect of fiscal equalization grants on local expenditure using a RK design. Results suggest that RK estimation with a confounding nonlinearity often suffers from bias or imprecision and estimates are credible only when relevant covariates are controlled for.

Decentralization leads the broad impact of accounting for local governments. Among other is the separation of powers from the centre, which has been handed to the local ( including state, province, county, and town) . Even so, the Central Government does not immediately fully release the local goverments. But the Central Government still needs to transfers intergovernmental grants to the local. One of the funds transfer is General Allocation Fund which can need by the local government freely for either operational expenditure or capital expenditure. The General Allocation Fund ( Dana Alokasi Uumum ) and the Original Region Revenue ( Pendapatan Asli Daerah) are several income account for local governments to be used as Local Expenditure ( Belanja Daerah) . One example of the waste in the BD can be seen through a phenomenon called the flypaper effect. Where DAU lag 1 is more significantly influential to BD than PAD lag 1. However, in this research gives empirical evidence that in North Sulawesi Province Government for the realization of the budget for the years 2001 until 2010, the flypaper effect phenomenon does not occur. This demonstrared by statistic tool, multiple regression generates the coefficient PAD lag 1 influences significantly to BD with 0.006 on α 0.05 whereas DAU lag 1 does not influence significant.Keywords: General Allocation Fund, Origin Region Revenue, Local Expenditure, Flypaper Effect.

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.

Among the best-known theorems of fiscal federalism is the presumed allocative and dis- tributive equivalence between a lump-sum grant to a collectivity and a set of lump sum grants to the members of a collectivity. Interestingly, the simple elegance of the theorem is at odds with ob- served behavior. Grants to governments produce greater public spending than does tax reduction. Explanations of this "flypaper effect" range from misspecified econometric modeling to pre- sumed behavior based on fiscal illusion. In this paper we show that theoretical equivalence exists in a model that recognizes only one tax share, the citizen voter's local tax share. When the model is expanded to include voters' federal tax shares as well as local taxes, non-equivalence and the flypaper effect become the rule, not the exception.

Uses aggregate time-series data to explore state and local budgetary responses to cuts in federal grant programs. Finds that the "flypaper effect" is two-way (spending falls in response to cuts by about the same magnitude as it rises in response to grant increases).

Recognizing that it is difficult to prove a negative, this paper marshals evidence in support of the hypothesis that the widely documented flypaper effect of federal grants to state and local governments is purely a statistical artifact. A review of previous studies and a monte carlo investigation suggest that the use of an inappropriate functional form may generate an illusory flypaper effect. A local expenditure equation is then estimated in alternative specifications with ten years of state level data. Empirical results confirm the sensitivity of the flypaper effect to specification, and tests of fit unambiguously favor one functional form. That specification yields no statistical evidence of a flypaper effect.

This paper empirically studies some determinants of the intergovernmental transfers in the Brazilian health care sector. In particular, we discuss and investigate the existence of a positive relationship between municipal revenues and federal transfers received through Unified Health System (Sistema Único de Saúde – SUS) by municipalities. As SUS legislation associates mandatory spending in health of municipalities to a portion of its revenues, the phenomenon was also investigated in the light of the flypaper effect theory. The empirical analysis was based on the estimation of fixed effect panel models. We considered a panel of Brazilian municipalities from 2002 to 2010. Data was mostly obtained from Departamento de Informações do SUS (DATASUS) and Sistema de Informações sobre Orçamentos Públicos em Saúde (SIOPS), both from Ministry of Health of Brazil. Our results show that municipal tax revenue has indeed a positive and significant impact on receiving transfers. Considering the redistributive aspect, this relation may not be desirable. We argue about the possibility that the funds transferred by SUS are not sufficient, so that a financial compensation of the local governments would be required to cover programs and services in their entirety. We also identified some evidence that there may be political factors influencing receipt of funds from SUS. Este trabalho estuda empiricamente alguns fatores determinantes das transferências intergovernamentais na área da saúde no Brasil. Em especial, discute e investiga a existência de uma relação positiva entre arrecadação municipal e o recebimento de recursos federais através do Sistema Único de Saúde (SUS) pelos municípios brasileiros. Como a legislação do SUS atrela gastos dos municípios obrigatórios em saúde a uma parcela de sua arrecadação, o fenômeno também pôde ser investigado à luz da teoria do flypaper effect. A análise empírica foi realizada através da estimação de modelos em painel com efeitos fixos. Para tanto, utilizou-se dados dos municípios brasileiros no período de 2002 a 2010, obtidos, em sua maioria, através do Departamento de Informações do SUS (DATASUS) e do Sistema de Informações sobre Orçamentos Públicos em Saúde (SIOPS), ambos do Ministério da Saúde. Os resultados apontam que a arrecadação municipal exerce, de fato, um impacto positivo e significante sobre o recebimento de transferências. Considerando o aspecto redistributivo, essa relação pode não ser desejável. Argumentamos sobre a possibilidade de que os recursos repassados pelo SUS não sejam suficientes, de modo que uma contrapartida financeira dos governos locais seria necessária para cobrir os custos dos programas e serviços em sua totalidade. Foram identificados também indícios de que pode haver fatores políticos influenciando o recebimento de recursos do SUS.

In a Regression Kink (RK) design with a finite sample, a confounding smooth nonlinear relationship between an assignment variable and an outcome variable around a threshold can be spuriously picked up as a kink and result in a biased estimate. In order to investigate how well RK designs handle such confounding nonlinearity, I firstly implement Monte Carlo simulations and then study the effect of fiscal equalization grants on local expenditure using a RK design. Results suggest that RK estimation with a confounding nonlinearity often suffers from bias or imprecision and estimates are credible only when relevant covariates are controlled for.

This paper produces spatial panel econometric estimates of the main determinants of the disparities in local welfare expenditures for the French mid sub-national jurisdiction level of Departments during the period spanning 1992-2008 and using a very rich dataset. In the standard local public good expenditures model where geography is traditionally absent, econometric estimations confirm the importance of socio-economic and demographic characteristics as main drivers of welfare expenditures (with tax price and income) but leave a large part unexplained due to relative localization. In the augmented model with spatial interactions, we find large expenditure interactions with a reaction function that slopes positively, when a department raises its expenditures by 5% while its neighbors increase theirs by 10%. We show that the classical expenditures function suffers from mis-specification with an upward biased income-elasticity. We obtain a robust elasticity divided by 3 compared to the base-case model, with a value passing from +0.6 to +0.2. Omitting geography thus leads to unduly attributing to income changes in expenditure stemming from local interactions. Finally, a significant flypaper effect is found in the data but whose magnitude is nearly halved when the spatial factor is controlled for. Possible explanations of our results are fiscal competition and/or political yardstick competition, with important implications for public policy, notably for the optimal design of equalization policies.

What happens to a state's spending when it receives an unconditional grant from the federal government? The standard theoretical analysis predicts that the increase in spending will be the same as that generated by an equivalent increase in local incomes--or roughly 5-10 percent for most states. In contrast, numerous empirical analyses have found that spending increases by much more, with some estimates near 100 percent. This result is known as the ’flypaper effect,’ since the money appears to ‘stick where it hits.’ The authors review this evidence as well as other studies that find similar behavior in firms.

This research purposed to know the effect of PAD and DAU toward regional expenditure in the country /city in East Kalimantan province and to know whether flypaper occur in the country/City of East Kalimantan Province in the 2010-2014.The instrument used in this research was the analysis of data panel regression. The results of this research showed that the local revenue (PAD) and (DAU) was took effect regional expenditure significantly. PAD took effect DAU toward regional expenditure, but DAU did not affect significant toward regional expenditure. During the period of this research did not happen flypaper in country/cityinthe ProvinceofEastKalimantan.ANALISIS FLYPAPER EFFECT PAD DAN DAU TERHADAP BELANJA DAERAH DI PROVINSI KALIMANTAN TIMUR TAHUN 2010-2014

Despite the federal structure of its constitution, no empirical study of fiscal illusion at the level of state expenditure has yet been undertaken in Australia. This paper seeks to go at least some way towards remedying the omission by subjecting the revenue-complexity, revenue-elasticity and flypaper hypotheses to pooled time-series, cross-sectional analysis of seven Australian states and territories for the period 1982 to 1992. The results obtained indicate that some support is provided for the revenue-complexity hypothesis, strong evidence exists for the flypaper effect, and virtually no empirical backing was found for the revenue-elasticity hypothesis. These results correspond with earlier work elsewhere on fiscal illusion at the level of the state.

The aim of this paper is to investigate the impact of fiscal decen- tralization on the size of regional governments in Spain, by controlling for economies of scale, interregional heterogeneity and institutional framework. We study it over 1985 to 2004 using a panel dataset of seventeen spanish regions. The results can be easily summarized. Firstly, it supports the classic public goods theory of a trade-off-between the economic benefits of size and the costs of heterogeneity. Secondly, it doesn’t reject the “Leviathan” hypoth- esis and neither does the “common pool” hypothesis. Thirdly, by contrast, the paper partly rejects the “Wallis”’ hypothesis. It argues that government size is mediated by financial resources obtained through intergovernmental grants, consistent with welfare economics and positive economic policies. We conclude that later advances in the decentralisation process must be compatible with the goal of reducing fiscal imbalances that emanate from the vertical structure of fiscal power. info:eu-repo/semantics/publishedVersion

This paper studies the effect of costly taxation on the fiscal response of local governments to intergovernmental transfers. Using a panel dataset of Peruvian municipalities, I find robust evidence that central government's grants have a greater stimulatory effect in municipalities facing higher tax collection costs. The results are consistent with costly taxation partially explaining the flypaper effect.

This paper tests the hypothesis that the stimulative effects of intergovernmental grants increase with the marginal cost of public funds of the recipient government. We present a simple theoretical framework that shows how a lump-sum transfer stimulates the marginal expenditures of a recipient government through an income effect and a price effect. We then test the prediction of this model using Canadian provincial data and exploit the discontinuity in the equalization grants allocation formula to identify the effects of grants. Our results indicate that the stimulative effects of lump-sum grants on spending increase with the provincial government’s marginal cost of public funds (MCF). One policy implication of our results is that higher intergovernmental transfers may be welfare improving if the federal government has a lower MCF than the provinces.

The purpose of this study is to identify and analyze the impact of the Intergovernmental transfer (Balance Fund) and Local Own Revenue to the local government expenditure as well as to know the occurrence of flypaper effect phenomenon in the relationship between those variables. This study is performed in two parts, firstly, using cross section data of 188 municipalities and regencies from 2006 to 2008, and secondly, using panel data of 484 Regencies and Municipalities during 2001 to 2008. The study showed that, firstly, Balance Fund and Local Own Revenue both partially and simultaneously have a significant impact on Local Government Expenditure. Second, the effect of Local Own revenue on Local Expenditure is stronger than the effect of Balance Fund. This proves the non-occurrence of flypaper effect in the local government response to the central government transfer fund.

This paper analyzes the effect of a change in lump-sum (private) income on the tax and expenditure decisions of a government constrained by taxpayers’ behavioral responses to the tax policy. Changes in lump-sum income are generally characterized as pure income effects on taxpayers’ behavior, and considered by normative public finance theory as imposing no price effects on the economy. In this paper we show that pure income effects at the individual level can lead to three distinguishable effects at the aggregate level. The reason is that a change in lump-sum income affects taxpayers’ behavioral responses to taxation and the size of the tax bases, altering the marginal cost of tax collections. The optimal fiscal responses of a welfare maximizing government can be broken up into a “net substitution effect,” associated with a change in the marginal cost of public funds, a “private income effect,” associated with the increase in private consumption, and a “public income effect,” which is equivalent to the effect of intergovernmental transfers. As a consequence, the effects of lump-sum income and intergovernmental transfers on fiscal decisions are shown to be generally different, but consistent with empirical findings of the literature on the flypaper effect.

In 2006, Quebec enacted a landmark reform to paid parental leave that greatly improved the generosity of entitlements and established a father’s non-transferable right to paid leave. Using data from the Employment Insurance Coverage Survey and employing a dierence-in-dier ences setup, I nd that the reform was associated with a striking rise in fathers’ participation: an increase of 52 percentage points in fathers’ participation rates and an increase in fathers’ leave duration by 3 weeks. Further, there is evidence of an intra-household ypaper eect via the labeling of leave as ‘daddy-only’, i.e., the allocation of leave within a household appears to be inuenced by the framing of legal rights even when they do not bind. The reform was associated with an increase of 11 percentage points in mothers’ participation rates, and the duration of the average maternity leave increased by over half a month under the new program. I nd no change in mothers’ exit rates from the labor market on average but do nd an increase in the probability of returning to the pre-birth employer if her husband took leave. The reform was also associated with a reduction in the average income loss experienced by households in the month following the birth.