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A Model of Asymmetries in the Flypaper Effect

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  • Steven C. Deller
  • Craig S. Maher

Abstract

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.

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File URL: http://hdl.handle.net/10.1093/publius/pjj005
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Bibliographic Info

Article provided by Oxford University Press in its journal Publius: The Journal of Federalism.

Volume (Year): 36 (2006)
Issue (Month): 2 ()
Pages: 213-229

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Handle: RePEc:oup:publus:v:36:y:2006:i:2:p:213-229

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  1. Deller, Steven C. & Walzer, Norman, 1995. "Structural Shifts In The Treatment Of Intergovernmental Aid: The Case Of Rural Roads," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 27(02), December.
  2. Gamkhar, Shama & Oates, Wallace E., 1996. "Asymmetries in the Response to Increases and Decreases in Intergovernmental Grants: Some Empirical Findings," National Tax Journal, National Tax Association, vol. 49(4), pages 501-12, December.
  3. Philip J. Grossman, 1990. "The impact of federal and state grants on local government spending: A test of the fiscal illusion hypothesis," Development Research Unit Working Paper Series archive-11, Monash University, Department of Economics.
  4. John Roemer & Selva Demiralp & Holly Liu & Jeffrey Williams, 2003. "The 'Flypaper Effect' is not an anomaly," Working Papers 04, University of California, Davis, Department of Economics.
  5. Melo, Ligia, 2002. " The Flypaper Effect under Different Institutional Contexts: The Colombian Case," Public Choice, Springer, vol. 111(3-4), pages 317-45, June.
  6. Bradford, David F & Oates, Wallace E, 1971. "Towards a Predictive Theory of Intergovernmental Grants," American Economic Review, American Economic Association, vol. 61(2), pages 440-48, May.
  7. Stine, William F., 1994. "Is Local Government Revenue Response to Federal Aid Symmetrical? Evidence from Pennsylvania County Governments in a Era of Retrenchment," National Tax Journal, National Tax Association, vol. 47(4), pages 799-816, December.
  8. Bailey, Stephen J & Connolly, Stephen, 1998. " The Flypaper Effect: Identifying Areas for Further Research," Public Choice, Springer, vol. 95(3-4), pages 335-61, June.
  9. Levaggi, Rosella & Zanola, Roberto, 2003. "Flypaper Effect and Sluggishness: Evidence from Regional Health Expenditure in Italy," International Tax and Public Finance, Springer, vol. 10(5), pages 535-47, September.
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Cited by:
  1. Luiz de Mello, 2007. "Local Government Finances: The Link between Intergovernmental Transfers and Net Worth," OECD Economics Department Working Papers 581, OECD Publishing.

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