The Marginal Cost of Public Funds and the Flypaper Effect
AbstractA lump-sum intergovernmental transfer has a "price effect", as well as an "income effect", because it allows the recipient government to reduce its tax rate, which lowers its marginal cost of public funds, while still providing the same level of public service. This reduction in the effective price of providing the public service helps to explain the "flypaper effect" - the empirical observation that a lump-sum grant has a much larger effect on spending than an increase in personal income. Contrary to the assertions of Mieszkowski (1994) and Hines and Thaler (1995), a model of a benevolent local government financing its expenditures with a distortionary tax predicts flypaper effects from lump-sum grants that are similar to those observed in many econometric studies
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Alberta, Department of Economics in its series Working Papers with number 2009-17.
Length: 31 pages
Date of creation: Jan 2009
Date of revision: 01 Jun 2010
flypaper effect; marginal cost of public funds; intergovernmental grants; fiscal federalism;
Other versions of this item:
- Bev Dahlby, 2011. "The marginal cost of public funds and the flypaper effect," International Tax and Public Finance, Springer, vol. 18(3), pages 304-321, June.
- H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
- H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-05 (All new papers)
- NEP-PBE-2009-04-05 (Public Economics)
- NEP-PUB-2009-04-05 (Public Finance)
- NEP-URE-2009-04-05 (Urban & Real Estate Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John E. Roemer & Joaquim Silvestre, .
"The ‘Flypaper Effect’ Is Not An Anomaly,"
Department of Economics
00-04, California Davis - Department of Economics.
- Michael Baker & Abigail Payne, 1998.
"An empirical study of matching grants: The "cap on CAP","
msmart-98-03, University of Toronto, Department of Economics.
- Baker, Michael & Payne, A. Abigail & Smart, Michael, 1999. "An empirical study of matching grants: the 'cap on CAP'," Journal of Public Economics, Elsevier, vol. 72(2), pages 269-288, May.
- Gary S. Becker & Casey B. Mulligan, 1998.
"Deadweight Costs and the Size of Government,"
NBER Working Papers
6789, National Bureau of Economic Research, Inc.
- Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," University of Chicago - George G. Stigler Center for Study of Economy and State 144, Chicago - Center for Study of Economy and State.
- 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.
- Thiess Buettner & David E. Wildasin, 2003.
"The Dynamics of Municipal Fiscal Adjustment,"
- Thiess Buettner & David E. Wildasin, 2002. "The Dynamics of Municipal Fiscal Adjustment," CESifo Working Paper Series 649, CESifo Group Munich.
- David E. Wildasin & Thiess Buettner, 2005. "The Dynamics of Municipal Fiscal Adjustment," Working Papers 2005-03, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
- Andrew Haughwout & Robert Inman & Steven G. Craig & Thomas Luce, 2000.
"Local Revenue Hills: Evidence from Four U. S. Cities,"
PIER Working Paper Archive
03-012, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Mar 2003.
- Andrew Haughwout & Robert Inman & Steven Craig & Thomas Luce, 2004. "Local Revenue Hills: Evidence from Four U.S. Cities," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 570-585, May.
- Andrew F. Haughwout & Robert P. Inman & Steven Craig & Thomas Luce, 2003. "Local Revenue Hills: Evidence from Four U.S. Cities," NBER Working Papers 9686, National Bureau of Economic Research, Inc.
- James R. Hines & Richard H. Thaler, 1995. "The Flypaper Effect," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 217-226, Fall.
- 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.
- Lars-Erik Borge, 1995. "Lump-Sum Intergovernmental Grants Have Price Effects: a Note," Public Finance Review, , vol. 23(2), pages 271-274, April.
- Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
- Peter C. Coyte & Stuart Landon, 1990. "Cost-Sharing versus Block-Funding in a Federal System: A Demand Systems Approach," Canadian Journal of Economics, Canadian Economics Association, vol. 23(4), pages 817-38, November.
- Stewart, Mark F, 1996. "Fiscal Illusion (the Flypaper Effect) and Government Spending in Australia," Australian Economic Papers, Wiley Blackwell, vol. 35(67), pages 390-96, December.
- Dahlby, Bev, 2009. "The Optimal Taxation Approach to Intergovernmental Grants," Working Papers 2009-16, University of Alberta, Department of Economics.
- Hammes, David L & Wills, Douglas T, 1987. "Fiscal Illusion and the Grantor Government in Canada," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 707-13, October.
- Craig Volden, 2007. "Intergovernmental Grants: A Formal Model of Interrelated National and Subnational Political Decisions," Publius: The Journal of Federalism, Oxford University Press, vol. 37(2), pages 209-243, Spring.
- Michael Smart, 2007.
"Raising Taxes through Equalization,"
CESifo Working Paper Series
1926, CESifo Group Munich.
- Dollery, Brian E & Worthington, Andrew C, 1996. " The Empirical Analysis of Fiscal Illusion," Journal of Economic Surveys, Wiley Blackwell, vol. 10(3), pages 261-97, September.
- Bradford, David F & Oates, Wallace E, 1971. "An Analysis of Revenue Sharing in a New Approach to Collective Fiscal Decisions," The Quarterly Journal of Economics, MIT Press, vol. 85(3), pages 416-39, August.
- Michael Smart, 1998. "Taxation and Deadweight Loss in a System of Intergovernmental Transfers," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 189-206, February.
- Logan, Robert R, 1986. "Fiscal Illusion and the Grantor Government," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1304-18, December.
- Winer, Stanley L, 1983. "Some Evidence on the Effect of the Separation of Spending and Taxing Decisions," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 126-40, February.
- Bev Dahlby, 2008. "The Marginal Cost of Public Funds: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042509, January.
- Bev Dahlby & Ergete Ferede, 2012. "The Stimulative Effects of Intergovernmental Grants and the Marginal Cost of Public Funds," CESifo Working Paper Series 3863, CESifo Group Munich.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Brenda Carrier).
If references are entirely missing, you can add them using this form.