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How sticky are local expenditures in Italy? Assessing the relevance of the �flypaper effect� through municipal data

  • Elena Gennari

    ()

    (Bank of Italy)

  • Giovanna Messina

    ()

    (Bank of Italy)

Registered author(s):

    An extensive literature analyses the impact of upper-tier transfers on the spending behaviour of lower level governments. According to the median voter framework, a transfer from the centre should act as a lump sum grant to residents and thus be spent by jurisdictions in the same proportion as residents are willing to spend their own money on public goods and services. But the actual local expenditure response to central government transfers is stronger than predicted by the theory, giving rise to the �flypaper effect�. Using the database on municipal accounts, and various other information sources, this work aims at assessing the size of the effect for Italian municipalities and the symmetry in the local expenditure response to central government transfers. Our dataset enables us also to investigate the role of some political factors. We find a sizeable effect and a remarkable asymmetric response of municipal expenditures to central government transfers as well as a significant role for political variables.

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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2012/2012-0844/en_tema_844.pdf
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    Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 844.

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    Date of creation: Jan 2012
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    Handle: RePEc:bdi:wptemi:td_844_12
    Contact details of provider: Postal: Via Nazionale, 91 - 00184 Roma
    Web page: http://www.bancaditalia.it

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    1. 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.
    2. Gemmell, Norman & Morrissey, Oliver & Pinar, Abuzer, 2002. " Fiscal Illusion and Political Accountability: Theory and Evidence from Two Local Tax Regimes in Britain," Public Choice, Springer, vol. 110(3-4), pages 199-224, March.
    3. Gabriella Legrenzi & Costas Milas, 2006. "Asymmetric and Non-Linear Adjustments in Local Fiscal Policy," Keele Economics Research Papers KERP 2006/16, Centre for Economic Research, Keele University.
    4. Case, Anne C. & Rosen, Harvey S. & Hines, James Jr., 1993. "Budget spillovers and fiscal policy interdependence : Evidence from the states," Journal of Public Economics, Elsevier, vol. 52(3), pages 285-307, October.
    5. Chiara Dalle Nogare & Matteo Galizzi, 2011. "The political economy of cultural spending: evidence from Italian cities," Journal of Cultural Economics, Springer, vol. 35(3), pages 203-231, August.
    6. Lars-Erik Borge & Torberg Falch & Per Tovmo, 2008. "Public sector efficiency: the roles of political and budgetary institutions, fiscal capacity, and democratic participation," Public Choice, Springer, vol. 136(3), pages 475-495, September.
    7. Julia Darby & Anton Muscatelli & Graeme Roy, 2004. "Fiscal Federalism, Fiscal Consolidations and Cuts in Central Government Grants: Evidence from an Event Study," CESifo Working Paper Series 1305, CESifo Group Munich.
    8. Per Tovmo & Torberg Falch, 2002. "The flypaper effect and political strength," Economics of Governance, Springer, vol. 3(2), pages 153-170, 07.
    9. Levaggi, Rosella & Zanola, Roberto, 2003. "Flypaper Effect and Sluggishness: Evidence from Regional Health Expenditure in Italy," International Tax and Public Finance, Springer, vol. 10(5), pages 535-47, September.
    10. Gamkhar, Shama & Oates, Wallace E., 1996. "Asymmetries in the Response to Increases and Decreases in Intergovernmental Grants: Some Empirical Findings," National Tax Journal, National Tax Association, vol. 49(4), pages 501-12, December.
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