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The Flypaper Effect

  • James R. Hines
  • Richard H. Thaler

What happens to a state's spending when it receives an unconditional grant from the federal government? The standard theoretical analysis predicts that the increase in spending will be the same as that generated by an equivalent increase in local incomes--or roughly 5-10 percent for most states. In contrast, numerous empirical analyses have found that spending increases by much more, with some estimates near 100 percent. This result is known as the 'flypaper effect,' since the money appears to 'stick where it hits.' The authors review this evidence as well as other studies that find similar behavior in firms.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.9.4.217
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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 9 (1995)
Issue (Month): 4 (Fall)
Pages: 217-226

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Handle: RePEc:aea:jecper:v:9:y:1995:i:4:p:217-26
Note: DOI: 10.1257/jep.9.4.217
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  1. Lankford, R. Hamilton, 1987. "A note on measuring flypaper effects," Journal of Urban Economics, Elsevier, vol. 22(1), pages 113-115, July.
  2. Moffitt, Robert A., 1984. "The effects of grants-in-aid on state and local expenditures : The case of AFDC," Journal of Public Economics, Elsevier, vol. 23(3), pages 279-305, April.
  3. 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.
  4. Filimon, Radu & Romer, Thomas & Rosenthal, Howard, 1982. "Asymmetric information and agenda control : The bases of monopoly power in public spending," Journal of Public Economics, Elsevier, vol. 17(1), pages 51-70, February.
  5. 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.
  6. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
  7. Wyckoff, Paul Gary, 1991. "The elusive flypaper effect," Journal of Urban Economics, Elsevier, vol. 30(3), pages 310-328, November.
  8. Stine, William F., 1994. "Is Local Government Revenue Response to Federal Aid Symmetrical? Evidence from Pennsylvania County Governments in a Era of Retrenchment," National Tax Journal, National Tax Association, vol. 47(4), pages 799-816, December.
  9. Hamilton, Bruce W., 1983. "The flypaper effect and other anomalies," Journal of Public Economics, Elsevier, vol. 22(3), pages 347-361, December.
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