Flypaper Effect

Abstract

The flypaper effect results when a dollar of exogenous grants-in-aid leads to significantly greater public spending than an equivalent dollar of citizen income: money sticks where it hits. Viewing governments as agents for a representative citizen voter, this empirical result is an anomaly. Four alternative explanations have been offered. First, it is a data problem; exogenous aid is mismeasured. Second, it is an econometric problem; important explanators of spending correlated with aid or income are excluded from the specification. Third, it is a specification problem; the representative citizen misperceives aid and the rational voter model misses this point. The empirical evidence suggests none of these explanations is sufficient. A fourth explanation seems most promising: it is politics. Rather than an anomaly, the flypaper effect is best seen as an outcome of political institutions and the associated incentives of elected officials.

This chapter was originally published in The New Palgrave Dictionary of Economics, Online edition, 2009. Edited by Steven N. Durlauf and Lawrence E. Blume.