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International Tax and Public Finance

, Volume 21, Issue 2, pp 324–344 | Cite as

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

  • Elena GennariEmail author
  • Giovanna Messina
Article

Abstract

An extensive literature analysed the impact of upper tier transfers on spending behaviour of lower level governments finding evidence of a flypaper effect, an overreaction to varying grants from upper tiers. Our work seeks to supplement a dearth of evidence for the Italian case by focusing on the responsiveness of municipal expenditures to State grants. We use a panel of almost 8,000 municipalities from 1999 to 2006. Budget data are matched with several other information sources, enabling us to investigate also the role played by some important political factors like the electoral cycle or the political strength of local cabinets. Application of panel data techniques with the use of instrumental variables and a dynamic setting highlights the presence of a sizeable flypaper effect and a significant role for political variables while the asymmetric response is not confirmed in all specifications.

Keywords

Flypaper effect Intergovernmental transfers Fiscal federalism 

JEL Classification

D72 H30 H72 H77 

Notes

Acknowledgements

We are grateful to the editor and to two anonymous referees for very constructive feedbacks. We also thank J. Angrist, D. Depalo and P. Tommasino, and seminar participants to the XXI SIEP Conference in Pavia and to the 50th SIE Conference in Rome, for useful comments on earlier drafts. The opinions expressed in this paper do not necessarily reflect those of the Bank of Italy. All errors are our own responsibility.

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Regional Economic Research DivisionBank of ItalyFlorenceItaly
  2. 2.Department for Structural Economic Analysis, Public Finance DivisionBank of ItalyRomeItaly

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