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Fiscal Illusion and the Australian Local Government Grants Process: How Sticky Is the Flypaper Effect?

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  • Worthington, Andrew C
  • Dollery, Brian E

Abstract

It has been argued that evidence supporting the widely documented flypaper effect is a statistical artifact; more specifically that previous studies are compromised by the use of inappropriate functional forms and the endogeneity of intergovernmental grant programs. While the first issue may be resolved with careful econometric testing, the second requires the incorporation of institutional constraints into governmental expenditure equations. Combining Australian local government expenditure equations and intergovernmental grant parameters, the flypaper controversy is analyzed. Empirical results confirm the sensitivity of the flypaper effect to specification and tests of fit unambiguously favor one functional form. That specification yields no evidence of a flypaper effect in the Australian institutional milieu. Copyright 1999 by Kluwer Academic Publishers

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  • Worthington, Andrew C & Dollery, Brian E, 1999. "Fiscal Illusion and the Australian Local Government Grants Process: How Sticky Is the Flypaper Effect?," Public Choice, Springer, vol. 99(1-2), pages 1-13, April.
    • Handle: RePEc:kap:pubcho:v:99:y:1999:i:1-2:p:1-13
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    Cited by:

    1. Pablo Acosta, 2010. "The “flypaper effect” in presence of spatial interdependence: evidence from Argentinean municipalities," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 44(3), pages 453-466, June.
    2. Gabriella Legrenzi & Costas Milas, 2002. "A Multivariate Approach to the Growth of Governments," Public Finance Review, , vol. 30(1), pages 56-76, January.
    3. Vittoria Idrisova & Lev Freinkman, 2010. "Impact of Federal Transfers over Regional Authorities Behavior," Research Paper Series, Gaidar Institute for Economic Policy, issue 137P.
    4. Roberto Dell'Anno & Morena De Stefano, 2014. "Un indicatore sintetico dell?Illusione Finanziaria. Un tentativo di stima per l?Italia," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2014(1), pages 65-92.
    5. Antti Saastamoinen & Mika Kortelainen, 2020. "When Does Money Stick in Education? Evidence from A Kinked Grant Rule," Education Finance and Policy, MIT Press, vol. 15(4), pages 708-735, Fall.
    6. Hammed Amusa & Robert Mabunda & Ramos Mabugu, 2008. "Fiscal Illusion At The Local Sphere: An Empirical Test Of The Flypaper Effect Using South African Municipal Data1," South African Journal of Economics, Economic Society of South Africa, vol. 76(3), pages 443-465, September.
    7. Yihua Yu & Jing Wang & Xi Tian, 2016. "Identifying the Flypaper Effect in the Presence of Spatial Dependence: Evidence from Education in China's Counties," Growth and Change, Wiley Blackwell, vol. 47(1), pages 93-110, March.
    8. Evgeny N. Timushev, 2017. "Flypaper Effect: Causes and Demonstration in the Budgetary System of Russia," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 5, pages 60-70, October.
    9. Marcel Thum & Thomas Fester & Andreas Kappler & Helmut Seitz, 2005. "Öffentliche Infrastruktur und kommunale Finanzen : Gutachten im Auftrag des Bundesministeriums für Verkehr, Bau- und Wohnungswesen und des Bundesamtes für Bauwesen und Raumordnung," ifo Dresden Studien, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 37, May.
    10. Majid Maddah & Fozieh Jeyhoon-Tabar, 2016. "Studying the Flypaper Effect in the Provinces of Iran (2000-2013)," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 20(3), pages 339-354, Summer.
    11. Chalil, Tengku Munawar, 2018. "The Size of Flypaper Effect in Decentralizing Indonesia," MPRA Paper 88037, University Library of Munich, Germany.
    12. Nuria Boch Roca & Javier Suárez Pandiello, 2015. "Politics and Finance in Spanish Municipalities," Hacienda Pública Española / Review of Public Economics, IEF, vol. 212(1), pages 51-66, March.
    13. Yasin ACAR, 2019. "Does Flypaper Effect Exist? New Evidence from Turkish Municipalities," Sosyoekonomi Journal, Sosyoekonomi Society, issue 27(39).
    14. Sangsoo Lim & Sanghoon Lee & Pilhyun Kim, 2017. "Asymmetry in the fly-paper effect of the national subsidy in Korea," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 22(4), pages 560-574, October.

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