The Flypaper Effect: Evidence from India

The flypaper effect refers to the phenomenon whereby expenditure stimulus from unconditional grants exceeds that from an equivalent increase in income. The flypaper effect has been described as "money sticks where it hits." The present study empirically tests the flypaper effect for the Indian economy. The study also tests the asymmetry hypothesis that looks at the impact of retrenchment in grants. Results obtained in the present study show the flypaper effect to be vindicated. We find that both capital and revenue expenditures receive a greater stimulus from grants than would an increase in income. Results show that in the prereform period both revenue and capital expenditures are maintained during periods of grant cuts. However, in the postreform period it is only expenditures on revenue accounts that are maintained in periods of grant reduction. We also find that during periods of grant reduction, state governments maintain their expenditure programs by raising their own tax revenue. This suggests that grants from the center have had a disincentive effect and could be a reason that state governments have not exploited their tax potential to the fullest. By bringing to the fore the disincentive effect of grants we wish to emphasize the urgency of taking a closer look at restructuring and redesigning our system of intergovernmental transfers.     

The flypaper effect and competition in the local market for public goods

In this paper, we explore how the ability of bureaucrats to extract resources from their community may be limited by competition in the local market for public goods. Specifically, we examine intergovernmental aid as a resource bureaucrats seek to control. Intergovernmental aid has been found to be more stimulative of local government expenditures than predicted by neo-classical economic theory. In this research, the ‘flypaper effect’ is used as an indicator of the ability of bureaucrats to control local resources in excess of local demand and preferences. We empirically relate variation in the flypaper effect to the extent of competition in the local market for public goods. Competition does not consistently limit the flypaper effect. The implications of this finding for theories of competition in the local market for public goods are then discussed.     

Mexican Municipalities and the Flypaper Effect

We investigate the phenomenon of flypaper effect and its relationship with the local tax effort by using a panel data comprising approximately 48 percent of the Mexican municipalities. Our estimations based on the fixed effect and difference GMM estimators confirm the existence of flypaper effect. Moreover, we find evidence to suggest that the richer municipalities are likely to experience substitution effect, i.e., the lower levels of tax effort. We also find that the magnitude of the flypaper effect is a decreasing function of the economic wellbeing of municipalities. This calls for an overhaul of the allocation mechanism of unconditional grants to the Mexican municipalities.     

Does more federal environmental funding increase or decrease states' efforts?

We examine the flow of federal grants‐in‐aid from the U.S. Environmental Protection Agency (EPA) to the states. We simultaneously model two dependent variables (the flow of EPA funds, and state environmental and natural resource budgets) to identify the independent roles of state political institutions, political preferences, economic and demographic characteristics, and the task environment. Our central focus, though, is on the relationship between grants and state spending after taking into account those direct effects. We examine the evidence for positive association (a flypaper effect) and negative association (crowding out). We show the different roles for political institutions, political preferences, demographic and economic characteristics, and the task environment in each spending context. Most importantly, we find evidence for a flypaper effect between federal funds and state spending: Federal spending and state spending are positively correlated after accounting for the contribution of the unique factors. © 2010 by the Association for Public Policy Analysis and Management.     

Federal Expenditure and Fiscal Illusion: A Test of the Flypaper Hypothesis in Australia

Despite the fact that there are strong a priori grounds forpresuming that the intergovernmental grants characteristic offiscal federalism in Australia may generate fiscal illusion,no empirical effort has been directed at this line of inquiry.The present article seeks to go some way toward remedying thisdeficiency by evaluating the flypaper variant of the fiscalillusion hypothesis using a time-series analysis of AustralianCommonwealth expenditures for 1981 to 1992. The results of theseestimations provide some tentative empirical support for theexistence of a flypaper effect on public expenditure in Australiafor the period under review.     

Urban Local Governments and the Flypaper Effect: Evidence from Maharashtra, India

This article examines decentralization in the state of Maharashtrain India, especially with respect to the functioning of itsurban local governments. Using panel data, the article specificallyinvestigates the flypaper effect of grants from the state governmentto urban local bodies. It also addresses the asymmetry hypothesis,which states that subnational governments respond differentlyto a reduction in grants than to an increase. Our results demonstratethe presence of the flypaper effect, but evidence regardingthe asymmetric response to a reduction in grants is ambiguous.     

Federal Grants, Earmarked Revenues, and Budget Crowd-Out: State Highway Funding

This paper examines the potential for budget crowd-out in state highway financing. Highway projects are funded primarily through state earmarked tax revenues and federal highway grants. Theoretically, these two sources of revenues could crowd-out state general funds, freeing up these funds for other uses. Previous studies of highway funding show little evidence of significant crowd-out, providing support for the "flypaper effect." The empirical model of this paper better controls for the endogeneity of federal highway grants and state earmarked highway revenues than previous studies and results suggest little to no crowd-out. Also, our study concludes that state budgeting decisions in the post-Intermodal Surface and Transporation Efficiency Act era still support the "flypaper effect."     

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.     

Per-capita public expenditures and population size: a non-parametric analysis using French data

Based on the median voter model, we specify a flexible general framework of the effect of municipality size on per-capita public expenditures. Previous literature has recognized that municipality size should have a non-linear effect on the quality of public goods provision and to this end different papers have applied a range of alternative parametric specifications. Using a very large sample of French “communes” we are able to estimate the effect of municipality size semi-parametrically. In contrast with the parametric specifications, we find evidence of the U-shaped relationship between per-capita public expenditures and population which is predicted by theory.     

A Model of Asymmetries in the Flypaper Effect

In this applied research study we examine the changing fiscalrelationship between state and local governments. Our researchquestion is simple: Do local governments treat state aid duringperiods of stability and instability in a systematic manner?Using data on Wisconsin's unconditional shared revenues programfrom 1990 to 2000, we find evidence of a flypaper effect andthat the relationship tends to be asymmetrical. The manner inwhich local governments treat intergovernmental aid is differentbetween periods of increases and decreases in aid. Specifically,using a model that allows for the identification of structureshifts we find evidence of fiscal replacement. In addition,we find that changes in aid impact types of spending differently.When aid is reduced, policymakers appear to be less inclinedto cut police and fire services than they are to cut servicessuch as parks and recreation.     

Effects of the Form of Government and Property Tax Limits on Local Finance in the Context of Revenue and Expenditure Simultaneity

This paper examines the impact of the form of government and state‐imposed property tax limits on municipal finance. We suggest that municipal revenues and expenditures are determined concurrently and estimate revenue and expenditure functions as simultaneous equations. We use the instrumental variable approach and fixed effects to address revenue and expenditure endogeneity. By testing the model on a cross‐section of rich municipal data for fiscal year 2002, we find evidence that revenues and expenditures are simultaneously determined, that potentially binding state‐imposed property tax limits effectively restrict local revenues and that the form of government is a significant predictor of local expenditures.     

The Fly Ball Effect: A Theoretical Framework for Understanding the Impacts of Short‐Term Seed Grants

The federal government has long used grants‐in‐aid to encourage state and local governments to carry out federal policies. Little research has been done that examines how short‐term seed grants affect program continuation. We propose the “fly ball effect” as a theoretical framework for understanding how seed money should impact program maintenance. Our theory suggests that short‐term seed grants by themselves should result in considerable funding uncertainty and program eliminations or stagnation once the initial grant money expires. We use data from drug court start‐ups in four states to provide empirical support for our theory. We argue that understanding the logic of the fly ball effect can help granting governments to improve the effectiveness of their grant funding systems, at least as measured by strong program continuation and expansion.     

Placing Racial Stereotypes in Context: Social Desirability and the Politics of Racial Hostility

Past research indicates that diversity at the level of larger geographic units (e.g., counties) is linked to white racial hostility. However, research has not addressed whether diverse local contexts may strengthen or weaken the relationship between racial stereotypes and policy attitudes. In a statewide opinion survey, we find that black‐white racial diversity at the zip‐code level strengthens the connection between racial stereotypes and race‐related policy attitudes among whites. Moreover, this effect is most pronounced among low self‐monitors, individuals who are relatively immune to the effects of egalitarian social norms likely to develop within a racially diverse local area. We find that this racializing effect is most evident for stereotypes (e.g., African Americans are “violent”) that are “relevant” to a given policy (e.g., capital punishment). Our findings lend nuance to research on the political effects of racial attitudes and confirm the racializing political effects of diverse residential settings on white Americans.     

The Impact of Converting Categorical into Block Grants: The Lessons from the 314(d) Block Grant in the Partnership for Health Act

Section 314(d) of P. L. 89–749, (1966), the Partnershipfor Health Act, combined nine categorical health grants intoone block grant for health. The impact of section 314(d), according to data gathered forthis study, can be summarized as follows: the block grant increasedthe administrative flexibility of state health officials; statehealth planning agencies generally did not have a major influenceon the block grant; state health planning agencies located ingovernors' offices had less influence over the block grant thanthose located in state health departments; Congress did notsignificantly increase expenditures for the block grant; nationalinfluence was increased by creating health programs that couldpotentially have been made part of the block grant; and theblock grant did not generally result in a reordering of spendingpriorities. The best explanation for the unspectacular effect of combiningseveral categorical grants into one block grant was that, withoutnew resources, the substantial (and welcome) new administrativeflexibility given state officials was insufficient to producean important substantive reordering of program priorities.     

Do intergovernmental grants create ratchets in state and local taxes?

A large literature on the ‘flypaper effect’ examines how federal grants to states at time period t affect state spending (or taxes) at time period t. We explore the fundamentally different question of how federal grants at time period t affect state tax policy in the future. Federal grants often result in states creating new programs and hiring new employees, and when the federal funding is discontinued, these new state programs must either be discontinued or financed through increases in state own source taxes. Government programs tend to be difficult to cut, as goes Milton Friedman’s famous quote about nothing being as permanent as a temporary government program, suggesting that it is likely that temporary federal grants create permanent (future) ratchets in state taxes. Far from being purely an academic question, this argument is why South Carolina’s Governor Mark Sanford attempted to turn down federal stimulus monies for his state. We examine both the impact of federal grants on future state budgets and how federal and state grants affect future local government budgets. Our findings confirm that grants indeed result in future state and local tax increases of roughly 40 cents for every dollar in grant money received in prior years.     

Institutional Sources of Legitimate Authority: An Experimental Investigation

Unelected officials with coercive powers (e.g., police, prosecutors, bureaucrats) vary markedly in the extent to which citizens view their actions as legitimate. We explore the institutional determinants of legitimate authority in the context of a public goods laboratory experiment. In the experiment, an “authority” can target one “citizen” for punishment following citizen contribution choices. Untargeted citizens can then choose to help or hinder the authority. This latter choice may be interpreted as a behavioral measure of the authority's legitimacy. We find that legitimacy is affected by how authorities are compensated, the transparency with which their decisions are observed, and an interaction between these. When transparency is high, citizens are more willing to assist authorities who receive fixed salaries than those who personally benefit from collected penalties, even when citizens' material incentives are controlled for. Lower transparency reduces support, but only for salaried enforcers.     

The impact of globalization on the composition of government expenditures: Evidence from panel data

According to the disciplining hypothesis, globalization restrains governments by inducing increased budgetary pressure. As a consequence, governments may attempt to curtail the welfare state, which is often seen as a drag on international competitiveness, by reducing especially their expenditures on transfers and subsidies. This globalization-induced welfare state retrenchment is potentially mitigated by citizens’ preferences to be compensated for the risks of globalization (“compensation hypothesis”). Employing two different datasets and various measures of globalization, we analyze whether globalization has indeed influenced the composition of government expenditures. For a sample of 60 countries, we examine the development of four broad expenditure categories for the period 1971–2001: capital expenditures, expenditures for goods and services, interest payments, and subsidies and other current transfers. A second dataset provides a much more detailed classification: public expenditures, expenditures for defence, order, economic affairs, environment, housing, health, recreation, education, and social expenditures. However, this second data set is only available since 1990—and only for OECD countries. Our results show that globalization did not influence the composition of government expenditures in a notable way.     

When Do Municipal Consolidations Reduce Government Expenditures? Evidence on the Role of Local Involvement

Higher levels of government motivate municipal consolidations as a tool to increase efficiency in the local government sector, yet research shows that consolidations typically fail to deliver the promised spending reductions. Since mergers often require significant changes to institutional structures, one explanation is that local decision makers can substantially influence the outcomes of the consolidation process. To explore this possibility, this article contrasts “encouraged but voluntary” mergers with those that were “forced” on local governments in the state of New South Wales, Australia. Results show that voluntary mergers resulted in a 10 percent decline in total per capita expenditures, but forced consolidations failed to reduce spending across the board. The policy conclusion is that decision makers considering structural reform should invest in obtaining the support and participation of local government decision makers.     

Simulating Massachusetts Municipalities' Recession Readiness: Early Warning of a Perfect Storm?

We simulate effects of two recessions on Massachusetts municipalities in light of their relative dependence on state aid, capacity to increase property taxes under Proposition 2½ constraints, growth, and nondiscretionary costs. We also explore the efficacy of local government stabilization funds in light of current literature on stabilization funds, slack resources in general, and the state–local fiscal relationship. We found substantial variance in Massachusetts municipalities' recession readiness. Fifty‐five (16 percent) municipalities have insufficient resources to weather a severe recession scenario without significant sacrifice due to reliance on state grants‐in‐aid, low property tax revenue growth, erosion of property tax revenue increments by increases in nondiscretionary expenditures, and inadequate stabilization funds.     

The consequences of the US DOJ’s antitrust activities: A macroeconomic perspective

Do the antitrust law enforcement activities of the US Department of Justice act as exogenous “technology shocks” or as “markup shocks” limiting market power and promoting economic growth? We analyze annual time series data from 1947 to 2003 on three measures of federal antitrust intervention: the ratio of the Antitrust Division’s budgetary expenditures to GDP as well as the numbers of civil and criminal antitrust cases instituted. We find that changes in the levels of these policy variables act like negative technology shocks and that the negative effects are transitory; antitrust policy generates no subsequent offsetting increases in productivity.