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The Illusion of Fiscal Illusion: Unsticking the Flypaper Effect

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  • Becker, Elizabeth
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    Abstract

    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. Copyright 1996 by Kluwer Academic Publishers

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    Bibliographic Info

    Article provided by Springer in its journal Public Choice.

    Volume (Year): 86 (1996)
    Issue (Month): 1-2 (January)
    Pages: 85-102

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    Handle: RePEc:kap:pubcho:v:86:y:1996:i:1-2:p:85-102

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    Cited by:
    1. Dahlberg, Matz & Jacob, Johanna, 2000. "Sluggishness, Endogeneity and the Demand for Local Public Services," Working Paper Series 2000:17, Uppsala University, Department of Economics.
    2. Laura Sour, 2013. "The flypaper effect in Mexican local government," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 28(1), pages 165-186.
    3. Matz Dahlberg & Eva Mörk & Jørn Rattsø & Hanna Ågren, 2006. "Using a Discontinuous Grant to Identify the Effect of Grants on Local Taxes and Spending," CESifo Working Paper Series 1857, CESifo Group Munich.
    4. James LeSage & Matthew Dominguez, 2012. "The importance of modeling spatial spillovers in public choice analysis," Public Choice, Springer, vol. 150(3), pages 525-545, March.
    5. Dahlberg, Matz & Mörk, Eva & Rattsø, Jørn & Ågren, Hanna, 2008. "Using a discontinuous grant rule to identify the effect of grants on local taxes and spending," Journal of Public Economics, Elsevier, vol. 92(12), pages 2320-2335, December.
    6. Facchini, Francois, 2014. "The determinants of public spending: a survey in a methodological perspective," MPRA Paper 53006, University Library of Munich, Germany.
    7. Brian Knight, 2002. "Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program," American Economic Review, American Economic Association, vol. 92(1), pages 71-92, March.
    8. Brian Knight, 2000. "The flypaper effect unstuck: evidence on endogenous grants from the Federal Highway Aid Program," Finance and Economics Discussion Series 2000-49, Board of Governors of the Federal Reserve System (U.S.).
    9. Juan González Alegre, 2012. "An evaluation of EU regional policy. Do structural actions crowd out public spending?," Public Choice, Springer, vol. 151(1), pages 1-21, April.
    10. Sergio Clavijo, 2005. "TRIBUTACION, EQUIDAD Y EFICIENCIA EN COLOMBIA: Guía para Salir de un Sistema Tributario Amalgamado," BORRADORES DE ECONOMIA 003663, BANCO DE LA REPÚBLICA.
    11. Elena Gennari & Giovanna Messina, 2014. "How sticky are local expenditures in Italy? Assessing the relevance of the flypaper effect through municipal data," International Tax and Public Finance, Springer, vol. 21(2), pages 324-344, April.
    12. Sergio Clavijo, . "Tributación, Equidad y Eficiencia en Colombia: Guía para Salir de un Sistema Amalgamado," Borradores de Economia 325, Banco de la Republica de Colombia.
    13. Antti Moisio, 2002. "Determinants of Expenditure Variation in Finnish Municipalities," Discussion Papers 269, Government Institute for Economic Research Finland (VATT).

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