The Flypaper Effect: Evidence from the Italian National Health System

Public expenditure reduction in Italy is achieved through a revision of social security and health care programmes. In particular, public health expenditure control has been implemented through a reform that imposes more stringent budget rules at local level and a considerable reduction in the grants-in-aid from central government. The response to a decrease in categorical lump-sum grants from the central to local governments might result in an asymmetrical response to intergovernmental grants: local spending is highly responsive to increases in grants, but it is relatively insensitive to grants reduction [Stine, 1994; Gramkhar and Oates, 1996]. In our paper we have estimated this hypothesis using a sample of cross-sectional and time- observations covering the 20 Italian regions over the period 1989-1993. Two different models have been estimated based on different budget balance rules. The empirical results of our model show the existence of a standard and a super flypaper effect in both models. The introduction of the soft-budget constraint hypothesis results in a stronger effect of grants and a lower response of own resources which shows that before reducing expenditure regional governments prefer to incur some deficit.