The Illusion of Fiscal Illusion: Unsticking the Flypaper Effect
Recognizing that it is difficult to prove a negative, this paper marshals evidence in support of the hypothesis that the widely documented flypaper effect of federal grants to state and local governments is purely a statistical artifact. A review of previous studies and a Monte Carlo investigation suggest that the use of an inappropriate functional form may generate an illusory flypaper effect. A local expenditure equation is then estimated in alternative specifications with ten years of state level data. Empirical results confirm the sensitivity of the flypaper effect to specification, and tests of fit unambiguously favor one functional form. That specification yields no statistical evidence of a flypaper effect. Copyright 1996 by Kluwer Academic Publishers
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