The flypaper effect: evidence from a natural experiment in Hesse
AbstractTheory suggests that transfers should have an effect on local fiscal policy that is similar to an equivalent increase in local incomes. Yet much of the empirical literature shows that local governments use transfers primarily to increase expenditures. Recent contributions have revisited this so called flypaper effect by using quasi-experimental methods, and some have found that the evidence for the flypaper effect dissipates once endogeneity of transfer receipts is accounted for. This paper contributes to the growing body of quasi-experimental research on the flypaper effect by exploiting a natural experiment in the German state of Hesse. Using discontinuities in the Hessian municipal transfer allocation formula to construct a set of instruments for municipal transfer receipts during the 2001-2010 period, it provides strong evidence in favor of the flypaper effect.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 37144.
Date of creation: Mar 2012
Date of revision:
Equalization transfers; Local fiscal policy; Population thresholds;
Find related papers by JEL classification:
- H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
- H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
- H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-14 (All new papers)
- NEP-GEO-2012-03-14 (Economic Geography)
- NEP-URE-2012-03-14 (Urban & Real Estate Economics)
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