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The flypaper effect unstuck: evidence on endogenous grants from the Federal Highway Aid Program

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Brian Knight

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Abstract

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.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2000-49.

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Date of creation: 2000
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Handle: RePEc:fip:fedgfe:2000-49

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Keywords: Expenditures; Public ; Local government ; State finance;

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  6. Besley, Timothy & Case, Anne, 2000. "Unnatural Experiments? Estimating the Incidence of Endogenous Policies," Economic Journal, Royal Economic Society, vol. 110(467), pages F672-94, November. [Downloadable!] (restricted)
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  7. Poterba, James M. & Venti, Steven F. & Wise, David A., 1995. "Do 401(k) contributions crowd out other personal saving?," Journal of Public Economics, Elsevier, vol. 58(1), pages 1-32, September. [Downloadable!] (restricted)
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  8. Feldstein, Martin S, 1975. "Wealth Neutrality and Local Choice in Public Education," American Economic Review, American Economic Association, vol. 65(1), pages 75-89, March. [Downloadable!] (restricted)
  9. Edward M. Gramlich & Harvy Galper, 1973. "State and Local Fiscal Behavior and Federal Grant Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1973-1), pages 15-66. [Downloadable!]
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  15. Timothy Besley & Stephen Coate, 1999. "Centralized versus Decentralized Provision of Local Public Goods: A Political Economy Analysis," NBER Working Papers 7084, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Wyckoff, Paul Gary, 1991. "The elusive flypaper effect," Journal of Urban Economics, Elsevier, vol. 30(3), pages 310-328, November. [Downloadable!] (restricted)
  17. Stratmann, Thomas, 1992. "The Effects of Logrolling on Congressional Voting," American Economic Review, American Economic Association, vol. 82(5), pages 1162-76, December. [Downloadable!] (restricted)
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  20. Alvarez, R Michael & Saving, Jason L, 1997. " Congressional Committees and the Political Economy of Federal Outlays," Public Choice, Springer, vol. 92(1-2), pages 55-73, July. [Downloadable!] (restricted)
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  23. Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September. [Downloadable!] (restricted)
  24. Payne, A. Abigail, 1998. "Does the government crowd-out private donations? New evidence from a sample of non-profit firms," Journal of Public Economics, Elsevier, vol. 69(3), pages 323-345, September. [Downloadable!] (restricted)
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