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The Flypaper Effect: Do Political Institutions Affect Danish Local Governments’ Response to Intergovernmental Grants?

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  • Marie Kjaergaard

Abstract

Despite a large number of empirical studies on the flypaper effect, it remains disputed whether the effect exists and to what extent it is asymmetrical. The flypaper effect suggests that intergovernmental grants tend to result in higher increases in public expenditures than a similar increase in citizens’ private income would have led to. An asymmetrical effect exists when the fiscal response differs depending on whether grants are increased or decreased. By considering political institutions that moderate the effect of intergovernmental grants, this article offers a theoretical explanation that accounts for the mixed empirical evidence. The local response to intergovernmental grants is tested using a reform of the Danish intergovernmental grant scheme in 2007. In line with the expectation, the article finds a strong asymmetrical effect, but more surprisingly, this effect is found both when subnational budget institutions are centralised and when they are fragmented.

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  • Marie Kjaergaard, 2015. "The Flypaper Effect: Do Political Institutions Affect Danish Local Governments’ Response to Intergovernmental Grants?," Local Government Studies, Taylor & Francis Journals, vol. 41(4), pages 534-552, July.
    • Handle: RePEc:taf:flgsxx:v:41:y:2015:i:4:p:534-552
    DOI: 10.1080/03003930.2014.968708
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    Cited by:

    1. Kaur, Amandeep & Mohanty, Ranjan Kumar & Chakraborty, Lekha & Rangan, Divy, 2021. "Ecological Fiscal Transfers and State-level Budgetary Spending in India: Analysing The Flypaper Effects in India," Working Papers 21/332, National Institute of Public Finance and Policy.
    2. Vicente Rios & Miriam Hortas-Rico & Pedro Pascual, 2022. "What shapes the flypaper effect? The role of the political environment in the budget process," Local Government Studies, Taylor & Francis Journals, vol. 48(5), pages 793-820, September.
    3. Muinelo-Gallo, Leonel & Azar, Paola, 2018. "Testing regional intergovernmental transfers asymmetries in Uruguay," MPRA Paper 90245, University Library of Munich, Germany.
    4. Kaur, Amandeep & Mohanty, Ranjan & Chakraborty, Lekha S & Rangan, Divy, 2021. "Ecological Fiscal Transfers and State-level Budgetary Spending in India: Analysing The Flypaper Effects," MPRA Paper 111947, University Library of Munich, Germany.
    5. Shani, Ron & Reingewertz, Yaniv & Vigoda-Gadot, Eran, 2023. "Intergovernmental grants and local public finance: An empirical examination in Israel," European Journal of Political Economy, Elsevier, vol. 79(C).
    6. Sithembiso Felix Mthimkhulu & Dev Tewari, 2024. "The Education Component and the Inclusion of the Enrolment Survival Measure: Provincial Equitable Share (PES)," Economies, MDPI, vol. 12(1), pages 1-22, January.

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