local government structure and public expenditures the law of 1 n postulates a positive relationship betweenthe number of democratically electedrepresentative districts and governmentspending strong support for thisrelationship exists in legislatures in theunited states at both the state andnational level and across countries fewstudies have examined this relationship atthe local level despite the fact that localgovernments operate under constraintssimilar to those faced by representativelegislatures using a sample of georgiacounties we find the number of countycommissioners to be positively correlatedwith county government expenditures indicating support for the law of 1 nat the local level

policy equilibria in a federal system the effects of higher tax ceilings for unemployment insurance abstract in many federal systems a higher authority imposes changes that may alter lower level policies depending on the type of change and differences among lower level parties for example we model changes in the parameters of american states unemployment insurance ui systems when the federal government raises the ui tax ceiling bargaining among interested parties alters ui benefits and taxes we estimate a difference in differences model describing ui tax payments when federal increases in 1972 1978 and 1983 increased some states ceilings where the federal constraint was binding taxes rose nearly 20 percent the theory and empirical analysis suggest themselves as examples for future research on topics in public finance labor economics and international trade

long run estimates of technological change and scale economies in a dynamic framework australian permanent building societies 1974 1990 abstract this paper formulates and estimates a dynamic model to investigate the characteristics of the cost function of australian permanent building societies while the results suggest that the societies adjust costs quickly to long run levels the modelling of cost dynamics is shown to have a significant influence on estimates of scale economies and on the identification of the timing of shifts in the cost frontier and changes in the growth of total factor productivity

pressure groups and public expenditures the flypaper effect reconsidered a model of government budgeting is developed in which lobbying by interest groups can divert the allocation of funds away from the one preferred by the median voter the model is applied to state and local governments to show that the flypaper effect the tendency for lump sum grants to increase public expenditures by more than an equivalent increase in the community s pretax income can be explained without the customary assumption of voter fiscal illusion furthermore the model predicts variation in the extent of the flypaper effect among expenditure categories as found in previous empirical studies

micro incentives and municipal behavior political decentralization and fiscal federalism in argentina and mexico summary this article analyzes the mixed results of political and fiscal decentralization in latin america by comparing taxing and spending policies in six cities in argentina and mexico consistent with previous studies we find that decentralization has been frustrated by overconcentration of power at the provincial level and large vertical fiscal imbalances though we characterize these as functional elements in a system of redistributive policy making that benefits a wide array of provincial and municipal actors we seek to add a new dimension to the literature by arguing that micro level incentives conditions and circumstances particular to specific places are more important determinants of municipal behavior than macro level structures those policy and institutional changes intended to make officials more responsive to local conditions federalism local elections intergovernmental transfers and own source revenues we conclude that the theory of decentralization relies on a flawed conception of the causal mechanisms that are hypothesized to create responsiveness in local officials

the illusion of fiscal illusion unsticking the flypaper effect 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

fiscal windfall curse abstract we study the impact of a one off exogenous fiscal windfall on local public finances in the canton of zurich in switzerland in contrast to much of the literature of resource windfalls the windfall occurred in a stable democracy with strong fiscal institutions it was due to the ipo of glencore on the london stock exchange in 2011 as a result its ceo paid an extraordinary tax bill of approximately chf 360 million about chf 238 million of that extra tax revenue entered the municipal resource equalization scheme and rained down on the municipalities of the canton of zurich this quasi experimental setup and our unusually rich dataset allow us to estimate the causal effect of this one off windfall on all municipal accounting positions we show that it triggered large permanent expenditure increases targeting specific groups mostly public employees at the same time as general tax cuts and user charge hikes the resulting imbalances caused a 7 5 fold increase in gross debt relative to the windfall this massive overreaction hints at a substantial fiscal windfall curse even with strong fiscal institutions 178 words

endogenous federal grants and crowd out of state government spending theory and evidence from the federal highway aid program contrary to simple theoretical predictions existing evidence suggests that federal grants do not crowd out state government spending a legislative bargaining model with endogenous grants documents a positive correlation between grant receipts and preferences for public goods this correlation has likely biased existing work against measuring crowd out to correct for such endogeneity the model motivates instruments based on the political power of state congressional delegations exploiting this exogenous variation in grants the instrumental variables estimator reports crowd out that is statistically and economically significant this endogeneity may explain the flypaper effect a nonequivalence between grant receipts and private income jel d70 h40 h77

federal grants and yardstick competition abstract citizens may see a government which wins a grant in competition with other states as especially effective and may therefore want it to increase spending similarly a voter who sees that a neighboring jurisdiction got a grant which his jurisdiction did not may think poorly of the ability of local officials and therefore reduce his demand for local spending data on spending by states in the united states show these effects

the flypaper effect and the deadweight loss from taxation abstract the difference in the effects on public expenditure by local governments of consumer s incomes and intergovernmental grants is shown to be consistent with the maximization of a representative consumer s utility by a local government increasing marginal deadweight loss of taxation accounts for the result explanations of the flypaper effect do not therefore require models of strategic bureaucratic behavior or voter misperceptions

the flypaper effect under different institutional contexts the colombian case an analysis of the flypapereffect under different institutionalcontexts is carried out for colombia where during the decentralizationprocess different sub national fiscalstructures with different degrees ofautonomy to manage transfers expenditures taxes and debt havecoexisted the analysis is carried outby using panel data models andalternative functional forms theresults show that the flypaper effectis observed when sub national entitiesare highly dependent onintergovernmental transfers ananalysis of asymmetries in response totransfers shows that sub nationalauthorities try to cover the reductionin transfers when the percentage oftransfers into the total currentrevenue is high

active labour market policies and the efficiency of the european social fund in spanish regions abstractactive labour market policies and the efficiency of the european social fund in spanish regions regional studies this paper estimates the determinants of public expenditure on active labour market policies almps at the regional level using panel data from a sample of the 17 spanish regions 1989 2010 the estimations take into account endogeneity dynamics and spatial dependence among regions estimations outcome is interpreted with the help of a simple theoretical model of intergovernmental grants results reveal that the european social fund is not effective in its aim of promoting almp expenditure and show that rent seeking when regions compete to attract funds from a common pool provokes the opposite effect which is exacerbated in the presence of imitation

which median voter under the median voter model the demand for local government spending is a function of the median voter income and median tax price of spending in the jurisdiction the theory provides a convenient framework for analytically aggregating the individuals public spending demands into a community public demand function it does not however provide guidance when selecting the proper definition of median income and tax share variables in empirical models data availability often dictates the selection of empirical proxies in applications but the question nonetheless remains is the appropriate empirical proxy median family income median household income or some other median income measure this paper addresses this and related questions concerning the specification of empirical expenditure functions for local governments the median voter model has proved to be an enduring device in public economics but even while it continues to be widely used in both theoretical and empirical studies of local government spending behavior the median voter model itself has become the focus of study although various specifications and modifications have been examined and compared in the literture the question of the appropriate median definition in empirical models has been overlooked thus far the usual methods of testing competing specifications in the local public spending literature is to evaluate prediction errors or the sign of key parameters in an estimated expenditure function 4 6 9 11 14 19 the nature of our question however requires a different type of test one capable of evaluating competing hypotheses that entail mutually exclusive functional forms or sets of regressors the cox test represents an appropriate procedure for evaluating the competing median definitions and related functional form questions in this paper this test based on theoretical results by cox 2 3 has several advantages in our application first the test is tractable and the statistics have well defined properties the asymptotic distribution of the calculated statistics are known thereby avoiding the use of bootstrap or other simulation methods in our evaluation second the test allows for bilateral rejection so that we

intergovernmental transfers and procyclical public spending this paper tests the predictions that i sub central government expenditures are procyclical and ii sub central government expenditures are likely to be more procyclical than central government spending the predictions are based on the importance of voracity effects and on the proposition that they are systematically more pervasive if spending is financed by intergovernmental transfers evidence from 23 oecd countries between 1995 and 2006 indicates that sub central government spending is more procyclical than central government expenditure

the flypaper effect what happens to a state s spending when it receives an unconditional grant from the federal government the standard theoretical analysis predicts that the increase in spending will be the same as that generated by an equivalent increase in local incomes or roughly 5 10 percent for most states in contrast numerous empirical analyses have found that spending increases by much more with some estimates near 100 percent this result is known as the flypaper effect since the money appears to stick where it hits the authors review this evidence as well as other studies that find similar behavior in firms

fiscal illusion uncertainty and the flypaper effect abstract the flypaper effect is the empirical observation that increases in intergovernmental aid stimulate greater local government expenditure than do increases in voter income fiscal illusion provides a widely accepted explanation for this asymmetry models of voter behavior under fiscal illusion typically assume that taxpayers consistently misperceive nonstochastic average for marginal tax prices this paper develops an alternative framework in which rational voters recognize marginal tax prices but must make tax and expenditure plans under imperfect information or uncertainty various sources of uncertainty are analyzed and related to the flypaper effect and implications for public expenditure demand theory are discussed

asymmetries in the flypaper effect empirical evidence for the flemish municipalities recent empirical work on us governments indicates an asymmetry in the flypaper effect the elasticity of public spending with respect to changes in grants differs significantly for positive and negative changes using a panel of data on flemish municipalities covering the period 1989 1996 we also find clear evidence of asymmetrical reactions more precisely the results suggest the presence of a fiscal replacement type of asymmetry when grants grow municipalities spend most of the additional revenue however when grants fall spending is unaffected and municipalities compensate the loss through additional taxation

are legislators ideologues or the agents of constituents abstract legislatures often make important economic decisions a decade ago economists viewed each legislator as the agent if not of the median voter of some pivotal voter in a party constituency therefore the voting decision of a legislator could readily be predicted if one could measure the preferences of the relevant pivotal voter models where interests on specific issues can be simply linked to votes on the same issues are questionable however since votes will be traded across issues political parties are one important vehicle for organizing such trades a simple empirical test for the united states senate however clearly rejects the notion that the representative is the agent of the median voter or a local party constituency even if vote trades are allowed thus there is ample opportunity for politicians even under reelection constraints to either voice their own ideology or that of idiosyncratic support coalitions the relevant theory and empirical evidence is summarized and some validating tests for european parliaments are suggested

public employment and the double role of bureaucrats bureaucrats in the government sector have a double role since they are both suppliers and demanders of public employment they are publicly employed supply labor and they have an important say in deciding the size of the municipal employment demand labor in this paper we present and estimate a theoretical model that focuses on this double role of bureaucrats the predictions from the theoretical model are supported by our empirical results the estimates based on data from swedish municipalities 1990 2002 show that wages have smaller effects on the demand for bureaucrats than on the demand for other types of public employees actually wages have no significant effect on the number of bureaucrats the municipality employs

local public expenditure in sweden a model where the median voter is not necessarily decisive abstract this paper deals with local public expenditures and the analysis is based on cross section data for the swedish municipalities two models are estimated one is the basic median voter model where the decisive voter is assumed to be the voter with median income while the other is a more general statistical alternative the statistical alternative nests the basic median voter model as a special case which makes it easy to test the null hypothesis that the basic median voter model is the correct model given that the alternative is the true general structure although our results indicate a rejection of the null hypothesis the estimation results are nevertheless similar for the two models

fiscal illusion at the local level empirical evidence for the flemish municipalities fiscal illusion refers to a systematically biased perception of fiscal parameters due to demand side error ignorance or supply side abusive behaviour as such it is a component of a more general tax choice framework

technological change in large u s commercial banks this article examines technological change its relationship to firm size and its impact on the efficient scale of output and product mix for large u s commercial banks the results suggest that technological change lowered real costs by about one percent per year increased the cost minimizing scale of outputs and affected product mix the authors do not find support for the galbraith schumpeter hypothesis this suggests that the largest banks cannot use innovation alone to outpace smaller banks the major implications are that public policies allowing freer banking combinations do not necessarily run counter to the public interest copyright 1991 by university of chicago press

the flypaper effect and competition in the local market for public goods in this paper we explore how the ability of bureaucrats to extract resources from their community may be limited by competition in the local market for public goods specifically we examine intergovernmental aid as a resource bureaucrats seek to control intergovernmental aid has been found to be more stimulative of local government expenditures than predicted by neo classical economic theory in this research the flypaper effect is used as an indicator of the ability of bureaucrats to control local resources in excess of local demand and preferences we empirically relate variation in the flypaper effect to the extent of competition in the local market for public goods competition does not consistently limit the flypaper effect the implications of this finding for theories of competition in the local market for public goods are then discussed

mental accounting of public funds the flypaper effect in the lab abstract we report evidence from a series of laboratory experiments that focus on mental accounting of public funds groups of three players decide upon how much to redistribute within the group we measure the preference to redistribute when transfers are made either out of individual accounts the players own money or out of a common account the group s money since the common account is dissolved after each round and paid out to individuals its size should not affect the decision to redistribute the experiment is designed to control for anchoring as a potential confounding effect we find that the size of the common account significantly affects redistribution behavior specifically the transfer increases in the size of the common account this effect is significantly more pronounced when the transfer is paid out of the common account instead of the individual account we interpret these findings as evidence for a flypaper effect due to mental accounting

the empirical analysis of fiscal illusion this paper examines the empirical analysis of the five main hypotheses subsumed under the generic term fiscal illusion after placing these hypotheses within a common theoretical framework the paper attempts to evaluate empirical research into the revenue complexity hypothesis the revenue elasticity hypothesis the flypaper effect renter illusion and debt illusion

a minimalist model of federal grants and flypaper effects abstract this paper shows that flypaper effects can be observed for unconditional federal grants even in the absence of agenda setters voting intransitivities informational asymmetries etc in a simple representation of a regime of federal general revenue grants median citizen voters are decisive over the levels of grants taxation and spending by assumption federal grants received equal federal taxes paid in each recipient locallity the size of the federal grant varies endogenously with demand conditions and the efficiency of tax technologies the apparent flypaper effects positive or negative vary with the source of the change in grants

asymmetric information and agenda control the bases of monopoly power in public spending abstract a pervasive empirical finding widely known as the flypaper effect is that lump sum intergovernmental grants generate considerably greater public spending by the recipient jurisdiction than would be predicted by equivalent shifts in personal income in that jurisdiction moreover such observations are inconsistent with standard median voter models of the political process we posit a model in which it is in the interest of suppliers of a collectively provided good not to generate full information to voters about outside aid the empirical results are consistent with flypaper and suggest that voters are very poorly informed about outside grants

the median voter model in public choice theory the changing perception by public choice theorists about the relevance of the median voter model is a result of excessive extrapolation of the conclusions of theoretical models to the real world early in the 1970s the median voter model was often accepted as implying that the output produced in the public sector was what was most preferred by the median voter this claim is excessive because the median voter model is only a model of demand aggregation under majority rule and has little to say about the supply side of the public sector in the late 1970s many scholars identified several circumstances under which the model would not apply in theory but these critiques of the model were often viewed as reasons to abandon the median voter model altogether the model went from having excessive claims that made the model appear to be more powerful than it really is to excessive claims that made the model appear to be less powerful than it really is these latter claims were often in response to the earlier claims rather than to the model appropriately applied

the flypaper effect identifying areas for further research the flypaper effect literature dates back three decades it is overwhelmingly neo classical in approach attempting to improve the median voter demand model and or temper it with public choice supply side perspectives whilst this approach provided valuable early substantial analytical insights more recent papers seem to have contributed only marginally to an understanding of the flypaper effect if indeed it exists at all hence as well as providing a long overdue comprehensive review of the literature on the flypaper effect this paper identifies more productive avenues for further research

technical change organizational form and the structure of bank production of those technological characteristics related to the nature of competition among firms in an industry or market scale economies and technical change are especially important economies of scale are said to exist when an equiproportional increase in all inputs results in a greater than proportional increase in output or equivalently when an increase in output at constant input prices leads to a less than proportional increase in total costs thus average costs decline as output expands depending upon the extent to which costs decline as output increases regulation of the firms in the industry may be necessary l the literature analyzing scale economies in commercial banking is voluminous the early studies on scale economies in banking include those by benston 1965 1972 greenbaum 1967 murphy 1972 and bell and murphy 1968 more recent studies include those by benston hanweck and humphrey 1982 and clark 1984 2 this literature has established that mild scale economies exist in bank

procyclical government spending a public choice analysis procyclical government spending occurs when government expenditures increase at a faster rate than income in an economic upturn but fall at a faster rate in a recession voracity effects occur when competition for increased spending proves more effective as national income increases public choice theory can be applied to describe the distribution of fiscal power across different tiers of government to shed insight into competition for intergovernmental transfers politicians have electoral incentives to press for intergovernmental transfers but they also have electoral incentives to signal their ability to manage the economy with this mix of incentives the prediction is that intergovernmental transfers will be procyclical and that sub central government spending will be more procyclical than central government spending public choice analysis of pressure for increased public spending predicts a specific pattern of cyclical government spending this pattern can be observed when analyzing government expenditures in 20 oecd countries between 1995 and 2006

the flypaper effect and other anomalies abstract i develop a model in which income both in its own right and as a proxy for other socioeconomic characteristics is an input in the production function for local public services the most obvious example is education though there are other applications as well the comparative statics results from this model yield the following results 1 the observed flypaper effect the tendency for local government to spend a higher fraction of unrestricted grants than income of residents may be due at least in part to the fact that own income but not grants is a substitute for purchased inputs in the technology hence the propensity to spend on purchased inputs out of own income is lower than out of grants 2 the income elasticity of demand for public sector output may be higher than the observed income elasticity of demand for purchased inputs 3 equalization of educational opportunity via wealth neutrality as suggested by feldstein requires major changes in education finance once we recognice the distinction between purchased inputs and output

fiscal illusion and the grantor government empirical studies indicate that unconditional intergovernmental grants have a flypaper effect several authors have modeled recipient government spending under fiscal illusion to explain this phenomenon in short grants reduce the perceived marginal cost of recipient government output this paper develops a more general model of illusion that incorporates the grantor government thereby eliminating inconsistencies encountered in previous models the more general model implies that grant finance increases the perceived marginal cost of grantor government output thus grant induced illusion should have two effects an increase in recipient output and a decrease in grantor output the empirical work supports this hypothesis

the optimal property tax with mobile nonresidential capital abstract implications of the dynamic nature of mobile nonresidential capital for community fiscal behavior are examined using the median voter framework the representative voter s control rule calls for the community to lower its current public service demand in order to retain or attract taxable capital the model predicts a positive short run and a negative long run income effect on public good demand incorporating intergovernmental aid into the model asymmetry between effects of the unconditional aid and of the voter income is demonstrated

how do senators vote disentangling the role of voter preferences party affiliation and senate ideology this paper develops a methodology for consistently estimating the relative weights in senator utility functions despite the fact that senator ideologies are unobserved the empirical results suggest that voter preferences are assigned only one quarter of the weight in senator utility functions the national party line also has some influence but the senator s own ideology is the primary determinant of roll call voting patterns these results cast doubt on the empirical relevance of the median voter theorem estimation of the model requires only roll call voting data making it widely applicable copyright 1996 by american economic association

list pricing versus dynamic pricing impact on the revenue risk abstract we consider the problem of a firm selling multiple products that consume a single resource over a finite time period the amount of the resource is exogenously fixed we analyze the difference between a dynamic pricing policy and a list price capacity control policy the dynamic pricing policy adjusts prices steadily resolving the underlying problem every time step whereas the list pricing policy sets static prices once but controls the capacity by allowing or preventing product sales as steady price changes are often costly or unachievable in practice we investigate the question of how much riskier it is to apply a list pricing policy rather than a dynamic pricing policy we conduct several numerical experiments and compare expected revenue standard deviation and conditional value at risk between the pricing policies the differences between the policies show that list pricing can be a useful strategy when dynamic pricing is costly or impractical

an evaluation of eu regional policy do structural actions crowd out public spending motivated by the lack of success of previous studies trying to estimate the impact of the european cohesion policy this paper brings an unexplored issue to light transfers that are intended to finance public investment in key areas for growth might be crowded out by subsidized governments to alternative uses in fact using annual data from fifteen member countries 1993 2005 we conclude that public investment in the member countries makes up around 60 of the increase in eu funds the limited role of the european commission in the allocation of the funds could partially explain this result

determinants of expenditure decentralization evidence from china summary this study is the first attempt to examine the determinants of expenditure decentralization at sub provincial levels in china the chinese central government gives detailed guidelines to local governments on public finance but ironically their expenditure assignment is far from being well regulated differences in fiscal decentralization on the expenditure side are enormous among local governments employing a panel dataset of 1995 2006 we provide empirical evidence that transfer dependency negatively affects expenditure decentralization in chinese local governments it suggests that intermediate governments i e provincial governments may have grabbed central grants for self interests

the median voter hypothesis evidence from general purpose local governments the median voter hypothesis mvh represents a much used as well as much criticized tool in the hands of public finance economists to evaluate the mvh this paper applies the cox specification test using data from general purpose municipal governments the cox test allows for possible simultaneous rejection of the mvh and all tested models thus providing stricter criteria than applied to date in empirical mvh analyses the test results reveal that the mvh is appropriate for explaining the aggregate behavior of municipal governments but not specific services further the single service and single tax base assumptions are not critical to the empirical mvh performance

the effects of grants in aid on state and local expenditures abstract this paper develops econometric methods to estimate the effect of the piecewise linear budget constraints created by grant formulas in which the subsidy rate is not constant over expenditures e g closed end grants the methods are applied to the afdc program the results show that because of the kinked nature of the grant formula 1 the present federal formula actually increases cross state inequality in afdc benefits 2 several subsidy rates in the formula actually reduce benefits and 3 the so called flypaper effect disappears

the elusive flypaper effect abstract the flypaper effect is the common empirical result that lump sum intergovernmental grants stimulate more local government spending than increases in private income which are theoretically equivalent in this paper four of the best known explanations of the flypaper effect are tested using data from michigan school districts none of these explanations are confirmed by the data the cause of the flypaper effect is likely to be much more deeply rooted in the nature of local decision making than is currently recognized

voting competitions with interested politicians platforms do not converge to the preferences of the median voter we examine equilibrium voting strategies for elections with interested politicians facing uncertainty about voter preferences if politicians utilities are defined over the set of strategies that voters select instead of being dependent only on the probability of winning an election equilibrium strategies will diverge instead of converging to the median voter s preferences as long as politicians have different preferences we present conditions i for political compromise and ii for politicians with different utility functions to merge into parties with complete strategic agreement

do intergovernmental grants create ratchets in state and local taxes a large literature on the flypaper effect examines how federal grants to states at time period t affect state spending or taxes at time period t we explore the fundamentally different question of how federal grants at time period t affect state tax policy in the future federal grants often result in states creating new programs and hiring new employees and when the federal funding is discontinued these new state programs must either be discontinued or financed through increases in state own source taxes government programs tend to be difficult to cut as goes milton friedman s famous quote about nothing being as permanent as a temporary government program suggesting that it is likely that temporary federal grants create permanent future ratchets in state taxes far from being purely an academic question this argument is why south carolina s governor mark sanford attempted to turn down federal stimulus monies for his state we examine both the impact of federal grants on future state budgets and how federal and state grants affect future local government budgets our findings confirm that grants indeed result in future state and local tax increases of roughly 40 cents for every dollar in grant money received in prior years