Unsticking the Flypaper Effect Using Distortionary Taxation
The flypaper effect is a widely-documented puzzle whereby the propensity of sub-national governmental units to spend out of unconditional transfers is higher than the propensity to spend out of private income. Building on previous insights in the literature that rationalize this puzzle using costly taxation, we develop a simple optimal fiscal policy model with distortionary taxation that generates two novel and testable implications: (i) there should be a positive association between the size of the flypaper effect and the level of the tax rate, and (ii) the flypaper effect should be larger the lower the elasticity of substitution between private and public spending and, in fact, should vanish for very high degrees of substitution. We show that these hypotheses hold for Argentinean provinces and Brazilian states.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Jun 2016|
|Publication status:||published as Carlos A. Vegh y Guillermo Vuletin, 2016. "Unsticking the flypaper effect using distortionary taxation," Económica, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 62, pages 185-237, January-D.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Roemer, John E & Silvestre, Joaquim, 2002.
" The "Flypaper Effect" Is Not an Anomaly,"
Journal of Public Economic Theory,
Association for Public Economic Theory, vol. 4(1), pages 1-17.
- John E. Roemer & Joaquim Silvestre, "undated". "The ‘Flypaper Effect’ Is Not An Anomaly," Department of Economics 00-04, California Davis - Department of Economics.
- John Roemer & Selva Demiralp & Holly Liu & Jeffrey Williams, 2003. "The 'Flypaper Effect' is not an anomaly," Working Papers 04, University of California, Davis, Department of Economics.
- Bergstrom, Theodore C & Goodman, Robert P, 1973. "Private Demands for Public Goods," American Economic Review, American Economic Association, vol. 63(3), pages 280-296, June.
- 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.
- Robin Boadway & Anwar Shah, 2007. "Intergovernmental Fiscal Transfers : Principles and Practice," World Bank Publications, The World Bank, number 7171, September.
- Borcherding, Thomas E & Deacon, Robert T, 1972. "The Demand for the Services of Non-Federal Governments," American Economic Review, American Economic Association, vol. 62(5), pages 891-901, December.
- Melville L. McMillan & W. Robert Wilson & Louise M. Arthur, 1981. "The Publicness of Local Public Goods: Evidence from Ontario Municipalities," Canadian Journal of Economics, Canadian Economics Association, vol. 14(4), pages 596-608, November.
- Hamilton, Bruce W., 1983. "The flypaper effect and other anomalies," Journal of Public Economics, Elsevier, vol. 22(3), pages 347-361, December.
- Craig, Steven G., 1987. "The impact of congestion on local public good production," Journal of Public Economics, Elsevier, vol. 32(3), pages 331-353, April.
- Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo Group Munich.
- Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World; Size, Causes, and Consequences," IMF Working Papers 00/26, International Monetary Fund.
- Reiter, Michael & Weichenrieder, Alfons J., 1999. "Public Goods, Club Goods, and the Measurement of Crowding," Journal of Urban Economics, Elsevier, vol. 46(1), pages 69-79, July.
- Craig Volden, 2007. "Intergovernmental Grants: A Formal Model of Interrelated National and Subnational Political Decisions," Publius: The Journal of Federalism, Oxford University Press, vol. 37(2), pages 209-243, Spring.
- Mariano Tommasi & Sebastian Saiegh & Pablo Sanguinetti, 2001. "Fiscal Federalism in Argentina: Policies, Politics, and Institutional Reform," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Spring 20), pages 157-212, January.
- Mariano Tommasi & Sebastian M. Saiegh & Pablo Sanguinetti, 2001. "Fiscal Federalism in Argentina: Policies, Politics, and Institutional Reform," Working Papers 32, Universidad de San Andres, Departamento de Economia, revised May 2001.
- Stiglitz, J. E., 1974. "The demand for education in public and private school systems," Journal of Public Economics, Elsevier, vol. 3(4), pages 349-385, November.
- Dollery, Brian E & Worthington, Andrew C, 1996. " The Empirical Analysis of Fiscal Illusion," Journal of Economic Surveys, Wiley Blackwell, vol. 10(3), pages 261-297, September.
- Becker, Gary S & Mulligan, Casey B, 2003. "Deadweight Costs and the Size of Government," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 293-340, October.
- Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," University of Chicago - George G. Stigler Center for Study of Economy and State 144, Chicago - Center for Study of Economy and State.
- Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," NBER Working Papers 6789, National Bureau of Economic Research, Inc.
- Bailey, Stephen J & Connolly, Stephen, 1998. "The Flypaper Effect: Identifying Areas for Further Research," Public Choice, Springer, vol. 95(3-4), pages 335-361, June.
- Oates, Wallace E., 1988. "On the measurement of congestion in the provision of local public goods," Journal of Urban Economics, Elsevier, vol. 24(1), pages 85-94, July.
- Hamilton, Jonathan H., 1986. "The flypaper effect and the deadweight loss from taxation," Journal of Urban Economics, Elsevier, vol. 19(2), pages 148-155, March.
- Auteri, Monica & Costantini, Mauro, 2010. "A panel cointegration approach to estimating substitution elasticities in consumption," Economic Modelling, Elsevier, vol. 27(3), pages 782-787, May.
- Okubo, Masakatsu, 2003. "Intratemporal substitution between private and government consumption: the case of Japan," Economics Letters, Elsevier, vol. 79(1), pages 75-81, April.
- Bev Dahlby, 2011. "The marginal cost of public funds and the flypaper effect," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(3), pages 304-321, June.
- Dahlby, Bev, 2009. "The Marginal Cost of Public Funds and the Flypaper Effect," Working Papers 2009-17, University of Alberta, Department of Economics, revised 01 Jun 2010.
- Robert A. Amano & Tony S. Wirjanto, 1997. "Intratemporal Substitution And Government Spending," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 605-609, November.
- Robert P. Inman, 2008. "The Flypaper Effect," NBER Working Papers 14579, National Bureau of Economic Research, Inc.
- Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
- Federico Sturzenegger & Rogério L. F. Werneck, 2006. "Fiscal Federalism and Procyclical Spending: The Cases of Argentina and Brazil," Económica, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 0(1-2), pages 151-194, January-D.
- Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
- Brian Knight, 2002. "Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program," American Economic Review, American Economic Association, vol. 92(1), pages 71-92, March.
- Gramlich, Edward M, 1969. "State and Local Governments and Their Budget Constraint," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(2), pages 163-182, June. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:22304. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.