median voters or budget maximizers evidence from school expenditure referenda some readers may have found these results of greater interest were we able to confirm the directional hypotheses of the certainty setter model in addition to finding that spending is related to the reversion the much weaker prediction of the uncertainty model yet the failure of the certainty when base elections were optional their infrequent occurrence might be expected under either a median voter or a setter model for those districts that did hold base elections the observations appear consistent with a setter model but are either inexplicable by or inconsistent with a median voter model finally both a the relationship between the number of budget elections and the presence of base elections and b the outcome of mandatory base elections in 1978 provide a set of observations that are challenging to either model a similar challenge was posed by our investigation of budget elections when we called attention to the inadequacy of static full information models rather than resolving the question of the simple setter model against the simple median voter model our results indicate that both may be inappropriate and that endeavors dealing with complexities omitted here are warranted

bureaucratic behavior in the local public sector a revealed preference approach public sector bureaucratic utility is typically assumed to be a function ofbudget size or government employment although intuitively appealing thereare no definitive direct tests of the assumption to fill this gap thispaper exploits data that isolate resource allocation decisions made by localpublic sector bureaucrats we use revealed preference theory to find thatthe bureaucracy behaves as if bureaucratic utility is an increasingfunction of employment across government functions and public spending providing direct evidence justifying the popular assumption in theoreticalmodels of government behavior

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

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

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 empirics of the municipal fiscal adjustment we summarize the literature that uses the vector error correction model approach to analyze the dynamics of the municipal fiscal adjustment the international comparison between samples collected from entire countries and specific regions reveals interesting similarities but also remarkable differences the main similarities are the fulfillment of the intertemporal budget constraint the volatility of the budgetary components and the importance of the intergovernmental transfers as an adjustment instrument the most remarkable difference is the preponderant role of the own revenues in the usa probably reflecting the larger fiscal autonomy of us municipalities in most cases the large municipalities seem to be more dependent on grants than their small counterparts although this pattern is broken in japan finally partial evidence supporting the existence of moral hazard problems and the flypaper effect is provided

unsticking the flypaper effect in an uncertain world abstract we provide a novel explanation for the flypaper effect based on insurance arguments in our model the flypaper effect arises due to the differential response of precautionary savings to private income or fiscal transfers shocks in an uncertain world with incomplete markets the model generates two testable implications i the flypaper effect is a decreasing function of the correlation between fiscal transfers and private income and ii such relationship is stronger the higher is the volatility of fiscal transfers and or private income an empirical analysis of argentinean provinces for the period 1963 2006 finds strong support for the model s implications

price and income distortions under separate spending and taxing decisions abstract this paper analyzes the extent to which intergovernmental grants create a discrepancy between the local voter s actual and perceived budget constraints the model is innovative in that it introduces grant illusion due to income misperceptions theoretically distinguishes illusion caused by income distortions from illusion caused by price distortions and separately tests for the magnitude of each empirical analysis identifies both price and income misperceptions as significant determinants of voter behavior these unbiased estimates reveal that previous research has misspecified the budget constraint resulting in overestimation of the stimulative effects of intergovernmental grants on local 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

classical unemployment accommodation policies and the adjustment of real wages a model of wage formation and stabilization policy in economies with strong trade unions is developed the analysis provides a theoretical underpinning for the assertion that accommodation policies may cause wage inflation and ultimately reduce employment various methods of accomplishing a real wage adjustment are discussed i a policy of complete nonaccommodation 2 continued accommodation policies but with lower employment targets 3 social contracts and 4 tax based incomes policies tip

a predictive index for the flypaper effect abstract it is well established that lump sum public grants boost local government spending more than an equivalent increase in private income the flypaper effect one shortcoming of the related literature is that it presumes all communities have an identical propensity to consume from an intergovernmental grant this paper is one attempt to allow for a heterogeneous response the working conjecture is that government expenditure on administrative overhead is a gauge of voter control over fiscal decisions high overhead spending implies a lower provision of public services and a stronger role for revenue maximizing forces in the budget setting process as such the flypaper effect should be more marked in high overhead communities an overhead index is applied to a sample of pennsylvania communities in the philadelphia metropolitan area it is difficult to understand these governments spending propensities from various windfall revenues without the help of the overhead index supportive evidence for this approach because overhead data is widely available the technique here can be used to address important policy questions such as predicting variations in state government responses to the recently created lump sum welfare grants

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

the overspending and flypaper effects of fiscal illusion theory and empirical evidence abstract this paper broadens the notion of fiscal illusion to include imperfect information where voters are unsure about how much they must pay for additional services or where they are unsure about the services received in return for higher taxes it shows how each type of voter imperfect information has different effects on public spending and modifies the overspending and flypaper effects predicted by the certainty model an empirical study of municipal expenditures provides support for the broader notion of fiscal illusion as imperfect information

economic incentives and political institutions spending and voting in school budget referenda abstract allocation of resources in the local public sector involves economic and political forces in many u s states the bulk of spending on public education is subject to referendum we link spending proposals to referendum outcomes our model makes use of voting data to shed light on the extent to which referenda constrain spending we use data from school budget referenda in 544 new york school districts for the 1975 1976 school year our econometric results and simulations based on them reveal considerable sensitivity of spending to the form of the state grants in aid structure as well as to the referendum requirement in addition large school districts appear to behave more like budget maximizers than do small districts where proposals appear more in line with median voter demands

conservative dichotomous choice responses in the active policy setting dc rejections below wtp an important feature of a contingent value cv study is that researchers design a survey that guides respondents to answer dichotomous choice dc questions as if they represent once and for all choices researchers frequently construct hypothetical markets to satisfy this condition yet detractors assert that hypotheticality leads inevitably to inflated dc responses for active policy questions however some respondents may suspect that a cv informs an actual policy issue so to reject a dc might induce the policy maker to reintroduce the policy with a price reduction or a program improvement with potential incentives to deflate a dc response when policies are active we locate two types of respondents that represent two different incentives one class is expected to be able to risk permanent rejection of a waiver from one automobile emissions inspection this class more frequently rejects a dc value known to improve existing conditions another respondent class is expected to be risk averse to defeat of the program or to excessive delay predictably these respondents more frequently accept a dc value that represents a known gain conservative dc responses have implications for the use of cv in active policy contexts opening a role for theory to assist practitioners in these circumstances

some evidence on the effect of the separation of spending and taxing decisions it is often argued that separation of public spending and taxing decisions engenders in the voter overoptimistic hopes that someone else will bear the cost of public services thereby inducing an increase in the size of government but are perceived tax prices systematically and persistently reduced by separation although in stock markets all agents expectations may be unbiased they may or may not be unbiased in political markets this paper analyzes the separation created in federal states when the central government finances local expenditures evidence from a dynamic decisive voter model is presented that indicates that the separation introduced by federal grants to canadian provinces did in fact reduce the perceived tax price of provincial public services and raise provincial expenditures the results suggest also that the effect of separation diminished over time

special interest groups and the allocation of public funds i propose a fully rational model of government contracting that explains differences in local government spending from grants and other income in this model violations of fungibility arise from dynamic interactions between politicians and interest groups with the ability to raise funds for the local government the predictions of the model are tested by exploiting unique features of windfalls received by states under a settlement with the tobacco industry although windfalls are legally unrestricted the median state increased spending on tobacco control programs from zero to 2 30 per capita upon receipt of funds the marginal propensity to spend on such programs is 0 20 from settlement revenue and zero from overall income states which were not involved in the settlement lawsuits spend less these results cannot be explained by existing models in the literature

estimating a public school expenditure model under binding spending limitations abstract a model explaining desired expenditure on education is estimated for a sample of new jersey school districts because the limit on annual increases in school spending is binding for a subsample of jurisdictions the tobit estimation procedure is used we test for equality of the pre and postlimitation structures and find substantial similarity the cap on expenditure increases was part of a court ordered reform of new jersey school finance law the results can be used to explain the failure of the existing school finance laws in lessening expenditure disparities at the lower end of the distribution

fiscal illusion budget maximizers and dynamic equilibrium this paper extends previous work in grant induced fiscal illusion in two ways while previous models have focused on the existence of rational comparative static equilibria in the presence of illusion this work focuses on the dynamic process by which steady state equilibria can be achieved furthermore endogeneity in grants is incorporated which necessitates the use of a budget maximizing hypothesis however it is shown that a broader interpretation of the budget maximizing assumption is necessary in order for this characterization to make sense in a grantor recipient framework

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

general revenue sharing and public sector unions abstract in this paper i find that in the context of a large intergovernmental general revenue sharing program implemented from 1972 to 1986 cities increased expenditures one for one with federal grants which is suggestive of a large flypaper effect furthermore i find that cities in states with pro union collective bargaining laws spent more than half of the transfers on increased wages while cities in states without such laws spent a greater fraction on increased government services these latter findings suggest that public sector unions play an important role in determining the usage and impact of intergovernmental grants

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

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 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

political markets property tax referenda and local school spending for better or worse fiscal decisions made through property tax referenda allow local political markets to work demand supply and voting process components of such markets are estimated for those oregon k 12 school districts that held referenda between 1981 and 1986 various attributes of the median voter were related to school spending but supply decisions by school boards and administrators were also important large districts used state aid to substitute for local property tax revenues on nearly a one for one basis while relying on reversion budgets inadequate property tax bases and implicit threats of school closures to extract greater than desired spending levels from the median voter

legal constraints and the choice of educational grant structures recent empirical work suggests that legalconstraints are significant in choosingstate educational grant structures unfortunately the literature has not takensuch constraints into account thus callinginto question particular grant structurerecommendations this paper studies theconditions under which a legislature underorder to reform its educational grantstructure prefers foundation grants overdistrict power equalization grants atheoretical model is presented in which thechoice is shown to depend on the legalbasis of the court s decision and theempirical validity of this conclusion isdemonstrated using connecticut data and aseparate model of school districtexpenditure choice

economies of scale and utilization in electricity generation in kuwait cost structure of electricity generation in kuwait has been examined with specific focus on the economies of scale and utilization this has been done by estimating a translog variable cost function using time series data covering the period from 1965 to 1990 the results indicate the existence of diseconomies of scale in the generation of electricity but no economies or diseconomies of utilization

the welfare effects of intergovernmental grants in an economy with distortionary local taxes a simple general equilibrium analysis this paper examines the welfare impact of intergovernmental transfers when recipient governments use distortionary taxes both lump sum and matching grants are investigated a distortionary factor depending on local demand and supply elasticities and the local tax rate on the taxed commodity determines the real income change to a jurisdiction per dollar transferred matching grants are dominated by lump sum grants when these can be set optimally for each recipient if grant policy must be uniform positive or negative matching rates are desired if equity adjusted distortionary factors are positively negatively correlated with local public service levels

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

a model of local demand for education abstract a careful modeling of the spending behavior of local school districts in new jersey is presented the theoretical model relies on the common hypothesis of political competition leading to a median outcome as well as the assumption that school superintendents act as budget maximizers the model is estimated for a sample of 177 school districts under three different aid formulas pooling of the cross sections suggests that the response of school expenditures to changes in variables other than those associated with school aid parameters has remained constant over time the results are discussed in the context of recent theories regarding the effect of intergovernmental aid on the level of public expenditure

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