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The Flypaper Effect

Author

Listed:
  • James R. Hines
  • Richard H. Thaler

Abstract

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.

Suggested Citation

  • James R. Hines & Richard H. Thaler, 1995. "The Flypaper Effect," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 217-226, Fall.
  • Handle: RePEc:aea:jecper:v:9:y:1995:i:4:p:217-26
    Note: DOI: 10.1257/jep.9.4.217
    as

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.9.4.217
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    References listed on IDEAS

    as
    1. 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.
    2. Lankford, R. Hamilton, 1987. "A note on measuring flypaper effects," Journal of Urban Economics, Elsevier, vol. 22(1), pages 113-115, July.
    3. Edward M. Gramlich & Harvy Galper, 1973. "State and Local Fiscal Behavior and Federal Grant Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 15-66.
    4. 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.
    5. Hamilton, Bruce W., 1983. "The flypaper effect and other anomalies," Journal of Public Economics, Elsevier, vol. 22(3), pages 347-361, December.
    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. 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.
    9. 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.
    10. 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;National Tax Journal, vol. 47(4), pages 799-816, December.
    11. 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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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