Abstract
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.
Similar content being viewed by others
References
Barro, R.J. (1991). If Moscow would only honor its debts. Wall Street Journal (12 June): A14.
Becker, E. and Lindsay, C.M. (1994). Does government free ride? Journal of Law and Economics, 37 (April): 133–152.
Bergstrom, T.C. and Goodman, R.P. (1973). Private demand for public goods. American Economic Review 63 (June): 280–296.
Bocherding, T. and Deacon, R.T. (1972). The demand for services of the nonfederal governments. American Economic Review 62 (December): 891–901.
Chernick, H. (1979). An economic model of the distribution of project grants. In P.M. Mieszkowski and W.H. Oakland (Eds.), Fiscal federalism and grants-in-aid. Washington, DC: The Urban Institute.
Dougan, W.R. and Kenyon, D.A. (1988). Pressure groups and public expenditures: The flypaper effect reconsidered. Economic Inquiry 26 (January): 159–170.
Ehrenberg, R.G. (1973). The demand for state and local government employees. American Economic Review 63 (June): 366–379.
Ehrenberg, R.G. and Smith, R.S. (1988). Modern labor economics, 3rd ed. Boston: Scott, Foresman and Company.
Feldstein, M.S. (1975). Wealth neutrality and local choice in public education. American Economic Review 65 (March): 75–89.
Filimon, R., Romer, T. and Rosenthal, H. (1982). Asymmetric information and agenda control: Bases of monopoly power and public spending. Journal of Public Economics 17 (February): 51–70.
Fisher, R.C. (1982). Income and grant effects on local expenditure: The flypaper effect and other difficulties. Journal of Urban Economics 12 (November): 324–345.
Follain, J.R. (1979). Grant impacts on local fiscal behavior: Full-information maximum likelihood estimates. Public Finance Quarterly 7 (October): 479–500.
Hamilton, B.W. (1983). The flypaper effect and other anomalies. Journal of Public Economics 22 (December): 347–362.
Harvey, A.C. and Collier, P. (1977). Testing for functional misspecification in regression analysis. Journal of Econometrics 6 (July): 103–119.
Hubbard, R.G. (1986). Pension wealth and individual saving: Some new evidence. Journal of Money, Credit and Banking 18 (May): 167–178.
Inman, R.P. (1971). Towards an econometric model of local budgeting. National Tax Association Papers and Proceedings 699–719.
Inman, R.P. (1978). Testing political economy's ‘as if’ proposition: Is the median voter really decisive? Public Choice 33 (Winter): 45–66.
Inman, R.P. (1979). The fiscal performance of local governments: An interpretative review. In P.M. Mieszkowski and M. Straszheim (Eds.), Current issues in urban economics. Baltimore: The Johns Hopkins University Press.
Islam, N.M. and Choudhury, S.A. (1990). Testing the exogeneity of grants to local governments. Canadian Journal of Economics 23 (August): 676–692.
Johnson, M.B. (1979). Community income, intergovernmental grants and local school district fiscal behavior. In P.M. Mieszowski and W.H. Oakland (Eds.), Fiscal federalism and grants-in-aid. Washington, DC: The Urban Institute.
Ladd, H.F. (1975). Local education expenditure, fiscal capacity and the composition of property tax base. National Tax Journal 28 (June): 145–158.
Lindsay, C.M. and Zycher, B. (1984). Substitution in public spending: Who pays for Canadian National Health Insurance. Economic Inquiry 22 (July): 35–56.
Marshall, L. (1991). New evidence on fiscal illusion: The 1986 tax windfalls. American Economic Review 81 (December): 1336–1344.
McGuire, M.C. (1978). A method for estimating the effect of a subsidy on the receiver's resource constraint: With an application to U.S. local governments, 1964–1971. Journal of Public Economics 10 (August): 25–44.
Megdal, S.B. (1987). The flypaper effect revisited: An econometric explanation. Review of Economics and Statistics 69 (May): 347–351.
Moffitt, R.A. (1986). The econometrics of piece-wise budget constraints. Journal of Business and Economic Statistics 4 (July): 317–328.
Oates, W.E. (1979). Lump-sum intergovernmental grants have price effects. In P.M. Mieszkowski and W.H. Oakland (Eds.), Fiscal federalism and grants-in-aid. Washington, DC: The Urban Institute.
Oates, W.E. (1988). On the nature and measurement of fiscal illusion: A survey. In G. Brennan (Ed.), Taxation and fiscal federalism: Essays in honor of Russell Matthews. Sydney: Australian National University Press.
Peltzman, S. (1973). The effect of government subsidies-in-kind on private expenditures: The case of higher education. Journal of Political Economy 81 (January/February): 1–27.
Peltzman, S. (1975). The effects of automobile safety regulation. Journal of Political Economy 83 (July/August): 677–725.
Rao, P. and Miller, R. (1971). Applied econometrics. Belmont, CA: Wadsworth.
Roberts, R. (1984). A positive model of private charity and public transfers. Journal of Political Economy 92 (February): 136–148.
Smith, G. (1975). Pitfalls in financial model building: A clarification. American Economic Review 65 (June): 510–516.
Theil, H. (1957). Specification errors and the estimation of economic relationships. Review of the International Statistical Institute 25: 41–51.
Thursby, J.G. (1979). Alternative specification error tests: A comparative study. Journal of the American Statistical Association 74 (March): 222–225.
Weicher, J.C. (1972). Aid, expenditures and local government structure. National Tax Journal 23 (December): 573–583.
White, H. (1980). Using least squares to approximate unknown regression functions. International Economic Review 21 (February): 149–170.
Wyckoff, P.G. (1991). The elusive flypaper effect. Journal of Urban Economics 30 (November): 310–328.
Zampelli, E.M. (1986). Resource fungibility, the flypaper effect and the expenditure impact of grants-in-aid. Review of Economics and Statistics 68 (February): 33–40.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Becker, E. The illusion of fiscal illusion: Unsticking the flypaper effect. Public Choice 86, 85–102 (1996). https://doi.org/10.1007/BF00114876
Accepted:
Issue Date:
DOI: https://doi.org/10.1007/BF00114876