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Unsticking the flypaper effect in an uncertain world

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  • Vegh, Carlos A.
  • Vuletin, Guillermo

Abstract

We provide a novel explanation for the flypaper effect based on insurance arguments. In our model, the flypaper effect arises due to the differential response of precautionary savings to private income or fiscal transfers shocks in an uncertain world with incomplete markets. The model generates two testable implications: (i) the flypaper effect is a decreasing function of the correlation between fiscal transfers and private income, and (ii) such relationship is stronger the higher is the volatility of fiscal transfers and/or private income. An empirical analysis of Argentinean provinces for the period 1963–2006 finds strong support for the model's implications.

Suggested Citation

  • Vegh, Carlos A. & Vuletin, Guillermo, 2015. "Unsticking the flypaper effect in an uncertain world," Journal of Public Economics, Elsevier, vol. 131(C), pages 142-155.
    • Handle: RePEc:eee:pubeco:v:131:y:2015:i:c:p:142-155
    DOI: 10.1016/j.jpubeco.2015.09.001
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    Cited by:

    1. Cruz, Tassia & Silva, Talita, 2020. "Minimum Spending in Education and the Flypaper Effect," Economics of Education Review, Elsevier, vol. 77(C).
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    3. Berset, Simon & Schelker, Mark, 2020. "Fiscal windfall curse," European Economic Review, Elsevier, vol. 130(C).
    4. Manuel E. Lago & Santiago Lago-Peñas & Jorge Martinez-Vazquez, 2022. "On the effects of intergovernmental grants: a survey," Working Papers. Collection A: Public economics, governance and decentralization 2204, Universidade de Vigo, GEN - Governance and Economics research Network.
    5. Vicente Rios & Miriam Hortas-Rico & Pedro Pascual, 2022. "What shapes the flypaper effect? The role of the political environment in the budget process," Local Government Studies, Taylor & Francis Journals, vol. 48(5), pages 793-820, September.
    6. Giuliano Masiero & Michael Santarossa, 2020. "Earthquakes, grants, and public expenditure: How municipalities respond to natural disasters," Journal of Regional Science, Wiley Blackwell, vol. 60(3), pages 481-516, June.
    7. Muinelo-Gallo, Leonel & Azar, Paola, 2018. "Testing regional intergovernmental transfers asymmetries in Uruguay," MPRA Paper 90245, University Library of Munich, Germany.
    8. Besfamille, Martín & Jorrat, Diego A. & Manzano, Osmel & Quiroga, Bernardo F. & Sanguinetti, Pablo, 2023. "How do subnational governments react to shocks to different revenue sources? Evidence from hydrocarbon-producing provinces in Argentina," Journal of Urban Economics, Elsevier, vol. 136(C).
    9. Flynn, Patrick & Smith, Tucker, 2022. "Rivers, lakes and revenue streams: The heterogeneous effects of Clean Water Act grants on local spending," Journal of Public Economics, Elsevier, vol. 212(C).
    10. Oyarzo, Mauricio & Paredes, Dusan, 2023. "Shocks derived from mining windfalls and horizontal transfers: Exploring the permanent income hypothesis in Chilean municipalities from a spatial competition approach," Socio-Economic Planning Sciences, Elsevier, vol. 86(C).
    11. Becker, Johannes & Hopp, Daniel & Kriebel, Michael, 2020. "Mental accounting of public funds – The flypaper effect in the lab," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 321-336.
    12. Jorge Pablo Puig & Alberto Porto, 2021. "On the interaction between own revenues and intergovernmental transfers. Evidence from Argentinean local governments," Asociación Argentina de Economía Política: Working Papers 4508, Asociación Argentina de Economía Política.
    13. Alekseev, Aleksandr & Alm, James & Sadiraj, Vjollca & Sjoquist, David L., 2021. "Experiments on the fly," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 288-305.
    14. Leonel Muinelo-Gallo, 2021. "Testing regional intergovernmental transfers effects in Uruguay," Sobre México. Revista de Economía, Sobre México. Temas en economía, vol. 2(4), pages 6-38.
    15. Cassidy, Traviss, 2017. "Revenue Persistence and Public Service Delivery," MPRA Paper 114464, University Library of Munich, Germany, revised 06 Sep 2022.
    16. Héctor Cardozo, 2021. "An estimation of expenditure needs for Argentinian provinces: A structural modeling approach," Ensayos de Política Económica, Departamento de Investigación Francisco Valsecchi, Facultad de Ciencias Económicas, Pontificia Universidad Católica Argentina., vol. 3(3), pages 41-75, Octubre.
    17. Jorge Puig & Alberto Porto, 2022. "On the fiscal behavior of subnational governments. A long-term vision for Argentina," Asociación Argentina de Economía Política: Working Papers 4588, Asociación Argentina de Economía Política.
    18. Sangsoo Lim & Sanghoon Lee & Pilhyun Kim, 2017. "Asymmetry in the fly-paper effect of the national subsidy in Korea," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 22(4), pages 560-574, October.

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    More about this item

    Keywords

    Flypaper effect; Uncertainty; Portfolio theory; Insurance; Precautionary saving; Incomplete markets;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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