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Is Vertical Fiscal Imbalance so Inefficient? or, The Flypaper Effect is not an Anomaly


  • Geoffrey Brennan
  • Jonathan Pincus

    (School of Economics, University of Adelaide)


This paper re-examines criticisms made of vertical fiscal imbalance in Australian and other federations. We argue that one of the central criticisms made of vertical fiscal imbalance is unproven. Vertical fiscal imbalance occurs when the central government collects more taxes than it spends on its own purposes; when that states collect less in tax than they spend; and the differences represent grants from the central government to the states (and local governments).

Suggested Citation

  • Geoffrey Brennan & Jonathan Pincus, 1998. "Is Vertical Fiscal Imbalance so Inefficient? or, The Flypaper Effect is not an Anomaly," School of Economics Working Papers 1998-06, University of Adelaide, School of Economics.
  • Handle: RePEc:adl:wpaper:1998-06

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    References listed on IDEAS

    1. Pommerehne, Werner W & Schneider, Friedrich, 1978. "Fiscal Illusion, Political Institutions, and Local Public Spending," Kyklos, Wiley Blackwell, vol. 31(3), pages 381-408.
    2. Breton, Albert, 1987. "Towards a theory of competitive federalism," European Journal of Political Economy, Elsevier, vol. 3(1-2), pages 263-329.
    3. repec:cup:apsrev:v:79:y:1985:i:04:p:994-1015_23 is not listed on IDEAS
    4. Heins, A James, 1971. "State and Local Response to Fiscal Decentralization," American Economic Review, American Economic Association, vol. 61(2), pages 449-455, May.
    5. Bradford, David F & Oates, Wallace E, 1971. "Towards a Predictive Theory of Intergovernmental Grants," American Economic Review, American Economic Association, vol. 61(2), pages 440-448, May.
    6. 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.
    7. Zampelli, Ernest M, 1986. "Resource Fungibility, the Flypaper Effect, and the Expenditure Impact of Grants-in-Aid," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 33-40, February.
    8. Romer, Thomas & Rosenthal, Howard, 1979. "The elusive median voter," Journal of Public Economics, Elsevier, vol. 12(2), pages 143-170, October.
    9. Martin McGuire, 1973. "Notes on Grants-in-Aid and Economic Interactions among Governments," Canadian Journal of Economics, Canadian Economics Association, vol. 6(2), pages 207-221, May.
    10. Shapiro, Perry & Petchey, Jeffrey D, 1994. "'Shall Become Exclusive': An Economic Analysis of Section 90," The Economic Record, The Economic Society of Australia, vol. 70(209), pages 171-182, June.
    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.
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    Cited by:

    1. Santiago Lago, "undated". "DescentralizaciÛn fiscal, nivelaciÛn interterritorial y externalidades presupuestarias: Perspectiva analÌtica y reflexiones para el caso espanol," Studies on the Spanish Economy 130, FEDEA.

    More about this item


    Australia; public finance;

    JEL classification:

    • 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


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