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A pervasive empirical finding, widely known as the ‘flypaper effect’, is that lump-sum intergovernmental grants generate considerably greater public spending by the recipient jurisdiction than would be predicted by equivalent shifts in personal income in that jurisdiction. Moreover, such observations are inconsistent with standard median voter models of the political process. We posit a model in which it is in the interest of suppliers of a collectively provided good not to generate full information to voters about outside aid. The empirical results are consistent with ‘flypaper’ and suggest that voters are very poorly informed about outside grants.

Using a median voter model, which assumes grants as endogenous, this paper finds strong evidence of the flypaper effect of unconditional grants to Ontario Municipalities. Unconditional grants are therefore not expected to reduce the tax burden of local residents.

In this paper, we explore how the ability of bureaucrats to extract resources from their community may be limited by competition in the local market for public goods. Specifically, we examine intergovernmental aid as a resource bureaucrats seek to control. Intergovernmental aid has been found to be more stimulative of local government expenditures than predicted by neo-classical economic theory. In this research, the 'flypaper effect' is used as an indicator of the ability of bureaucrats to control local resources in excess of local demand and preferences. We empirically relate variation in the flypaper effect to the extent of competition in the local market for public goods. Competition does not consistently limit the flypaper effect. The implications of this finding for theories of competition in the local market for public goods are then discussed.

Background Substance use disorders (SUDs) are a substantial problem in the United States (U.S.), affecting far more people than receive treatment. This is true broadly and within the U.S. military veteran population, which is our focus. To increase funding for treatment, the Veterans Health Administration (VA) has implemented several initiatives over the past decade to direct funds toward SUD treatment, supplementing the unrestricted funds VA medical centers receive. We study the ‘flypaper effect’ or the extent to which these directed funds have actually increased SUD treatment spending. Methods The study sample included all VA facilities and used observational data spanning years 2002 to 2010. Data were analyzed with a fixed effects, ordinary least squares specification with monetized workload as the dependent variable and funding dedicated to SUD specialty clinics the key dependent variable, controlling for unrestricted funding. Results We observed different effects of dedicated SUD specialty clinic funding over the period 2002 to 2008 versus 2009 to 2010. In the earlier period, there is no evidence of a significant portion of the dedicated funding sticking to its target. In the later period, a substantial proportion—38% in 2009 and 61% in 2010—of funding dedicated to SUD specialty clinics did translate into increased medical center spending for SUD treatment. In comparison, only five cents of every dollar of unrestricted funding is spent on SUD treatment. Conclusions Relative to unrestricted funding, dedicated funding for SUD treatment was much more effective in increasing workload, but only in years 2009 and 2010. The differences in those years relative to prior ones may be due to the observed management focus on SUD and SUD-related treatment in the later years. If true, this suggests that in a centrally directed healthcare organization such as the VA, funding dedicated to a service is a necessary, but not sufficient condition for increasing resources expended for that service.

An in-kind subsidy is equivalent, both theoretically and empirically, to an increase of income for an individual consumer. But the equivalence does not empirically carry over to in-kind grants by a central government to a local one: this has been seen as an anomaly and dubbed the “flypaper effect.” We argue that the “anomaly” label is incorrect: the nonequivalence of increases in grants and community income is predicted, almost everywhere, by models that understand collective decision as the outcome of electoral competition among political parties. In addition, we compute politico-economic equilibria for a model with two independent tax parameters and obtain numerical values that agree with the existing empirical literature.

Monte Carlo evidence is presented which supports the conclusion that when a block grants variable in an ordinary least squares (OLS) model is endogenously constructed due to the closed-ended nature of matching aid, estimates of the propensity to spend lump-sum aid are biased upward. The findings suggest that OLS estimates lead to erroneous conclusions regarding the existence of a flypaper effect and support the use of maximum likelihood models in situations where budget constraints are piecewise-linear.

The typical assumption that intergovernmental grants-in-aid alter a recipient's budget constraint according to the legal provisions of grant programs was first challenged by McGuire (1975, 1978) in a model where local officials are able to convert some fraction of conditional aid into pure fungible resources. This paper develops a model of local government expenditure decisions based on McGuire's original work and applies it to data for large U.S. city governments. The results lend strong support to the fungibility hypothesis. Additionally, and importantly, the results provide very little evidence in support of the so-called "flypaper effect" of unconditional grants. This is due to a more appropriate specification of the unconditional aid variable.

I. The analytic framework, 418. — II. Revenue sharing in a Lindahl model, 420. — III. Revenue sharing and majority rule, 423. — IV. Revenue sharing in a more general framework, 426. — V. When revenue sharing differs from income redistribution, 430. — VI. A system with many clubs, 432. — VII. Concluding remarks, 434. — Appendix: A general theorem, 435.