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The Flypaper Effect

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  • Robert P. Inman
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    Abstract

    The flypaper effect results when a dollar of exogenous grants-in-aid leads to significantly greater public spending than an equivalent dollar of citizen income: Money sticks where it hits. Viewing governments as agents for a representative citizen voter, this empirical result is an anomaly. Four alternative explanations have been offered. First, it's a data problem; matching grants have been mis-classified as exogenous aid. Second, it's an econometric problem; exogenous aid is correlated with omitted variables leading to a downward bias in estimates of income's effects and an upward bias in estimates of aid's effects. Third, it's a specification problem: the representative citizen either fails to observe lump-sum aid, or sees aid but mis-perceives its impact as an average price effect, or finally, sees and understands aid's budgetary effects but allocates "public" and "private" monies through separate "mental accounts." The empirical evidence suggests none of these explanations is sufficient. A fourth explanation seems most promising: It's politics. Rather than an anomaly, the flypaper effect is best seen as an outcome of political institutions and the associated incentives of elected officials.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14579.

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    Date of creation: Dec 2008
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    Handle: RePEc:nbr:nberwo:14579

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    1. Hamilton, Jonathan H., 1986. "The flypaper effect and the deadweight loss from taxation," Journal of Urban Economics, Elsevier, vol. 19(2), pages 148-155, March.
    2. Wyckoff, Paul Gary, 1991. "The elusive flypaper effect," Journal of Urban Economics, Elsevier, vol. 30(3), pages 310-328, November.
    3. Singhal, Monica, 2006. "Special Interest Groups and the Allocation of Public Funds," Working Paper Series rwp06-004, Harvard University, John F. Kennedy School of Government.
    4. Hamilton, Bruce W., 1983. "The flypaper effect and other anomalies," Journal of Public Economics, Elsevier, vol. 22(3), pages 347-361, December.
    5. Brian Knight, 2003. "Parochial Interests and the Centralized Provision of Local Public Goods: Evidence from Congressional Voting on Transportation Projects," NBER Working Papers 9748, National Bureau of Economic Research, Inc.
    6. Gordon, Nora, 2004. "Do federal grants boost school spending? Evidence from Title I," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1771-1792, August.
    7. Romer, Thomas & Rosenthal, Howard & Munley, Vincent G., 1992. "Economic incentives and political institutions: Spending and voting in school budget referenda," Journal of Public Economics, Elsevier, vol. 49(1), pages 1-33, October.
    8. 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.
    9. Michael Baker & Abigail Payne, 1998. "An empirical study of matching grants: The "cap on CAP"," Working Papers msmart-98-03, University of Toronto, Department of Economics.
    10. Ritva Reinikka & Jakob Svensson, 2004. "Local Capture: Evidence From a Central Government Transfer Program in Uganda," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 678-704, May.
    11. Helen F. Ladd, 1993. "State responses to the TRA86 revenue windfalls: A new test of the flypaper effect," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 82-103.
    12. Turnbull, Geoffrey K., 1998. "The Overspending and Flypaper Effects of Fiscal Illusion: Theory and Empirical Evidence," Journal of Urban Economics, Elsevier, vol. 44(1), pages 1-26, July.
    13. Lankford, R. Hamilton, 1987. "A note on measuring flypaper effects," Journal of Urban Economics, Elsevier, vol. 22(1), pages 113-115, July.
    14. Megdal, Sharon Bernstein, 1987. "The Flypaper Effect Revisited: An Econometric Explanation," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 347-51, May.
    15. Reinikka, Ritva & Svensson, Jakob, 2004. "The power of information : evidence from a newspaper campaign to reduce capture," Policy Research Working Paper Series 3239, The World Bank.
    16. Fisher, Ronald C., 1982. "Income and grant effects on local expenditure: The flypaper effect and other difficulties," Journal of Urban Economics, Elsevier, vol. 12(3), pages 324-345, November.
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    Cited by:
    1. Facchini, Francois, 2014. "The determinants of public spending: a survey in a methodological perspective," MPRA Paper 53006, University Library of Munich, Germany.
    2. Robert P. Inman, 2010. "States in Fiscal Distress," NBER Working Papers 16086, National Bureau of Economic Research, Inc.
    3. Furukawa, Mitsuaki & Takahata, Junichiro, 2013. "Is GBS Still a Preferable Aid Modality?," Working Papers 50, JICA Research Institute.
    4. Minoiu, Camelia & Reddy, Sanjay G., 2010. "Development aid and economic growth: A positive long-run relation," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(1), pages 27-39, February.
    5. Livio Di Matteo, 2010. "The sustainability of public health expenditures: evidence from the Canadian federation," The European Journal of Health Economics, Springer, vol. 11(6), pages 569-584, December.
    6. M. Govinda Rao & Choudhury, Mita, 2012. "Health Care Financing Reforms in India," Working Papers 12/100, National Institute of Public Finance and Policy.
    7. Fernando Antonio Slaibe Postali, 2014. "Oil windfalls and tax inefficiency: evidence from Brazil," Working Papers, Department of Economics 2014_02, University of São Paulo (FEA-USP).
    8. Ando, Michihito, 2013. "How Much Should We Trust Regression-Kink-Design Estimates?," Working Paper Series 2013:22, Uppsala University, Department of Economics.
    9. Sylvain Leduc & Daniel Wilson, 2013. "Are state governments roadblocks to federal stimulus? Evidence from highway grants in the 2009 Recovery Act," Working Paper Series 2013-16, Federal Reserve Bank of San Francisco.
    10. Luc Eyraud & Marialuz Moreno Badia, 2013. "Too Small to Fail? Subnational Spending Pressures in Europe," IMF Working Papers 13/46, International Monetary Fund.
    11. Robert P. Inman, 2010. "States in fiscal distress," Regional Economic Development, Federal Reserve Bank of St. Louis, issue Oct, pages 65-80.
    12. Fernando Antonio Slaibe Postali & Fabiana Fontes Rocha, 2011. "Resource windfalls,fiscal effort and public spending: evidence from Brazilianmunicipalities," Anais do XXXVII Encontro Nacional de Economia [Proceedings of the 37th Brazilian Economics Meeting] 64, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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