An Empirical Study on Flypaper Effect

Paper Summary:

This paper tests flypaper effect empirically using real expenditure data in state of Iowa and Georgia using the popular empirical expenditure specification. As a result of estimation, the writers finds that Iowa has the obvious flypaper effect, while Georgia does not. Section I is an introduction of the concepts at hand. Section II presents how flypaper effect leads to expansion effect on government expenditures graphically. Section III reviews traditional and current empirical literature on flypaper effect. Section IV simplifies the estimated expenditure function in order to show flypaper effect in Iowa and Georgia using 1990 data set. Section V investigates somewhat puzzling results in Georgia based on derivation of elasticities of expenditure with regard to income and intergovernmental grants. Section VI contains the summary and conclusion.

From the Paper:

"I. Introduction In providing a rationale for the observation that an increase in lump-sum governmental aid effects a larger increase in local government expenditures than an equivalent increase in residential incomes does, economists have offered the explanations for the so-called "flypaper effect" of state and local public finance. This paper aims to test flypaper effect empirically using 1990's expenditure data in state of Iowa and Georgia. According to Bocherding and Deacon (1982), Bergstrom and Goodman (1983), the popular empirical expenditure specification in local public finance is ln E = b0 + b1 In M + b2 ln TS + b3 ln(TS * A) + b4 ln N + b5 ln D + v, where E is total general expenditure, M is median household income, TS is tax share, which property tax divided by gross property tax base, A is an intergovernmental aid receipts from federal and state government, N is jurisdiction population, D is population density, and v is a stochastic error. Since model specification is log-linear form, b coefficients show an elasticity of expenditure with regard to the corresponding explanatory variables. Interestingly, the estimated expenditure functions of Georgia and Iowa, respectively, have a crucial difference of their coefficients of governmental aids and incomes. In case of Iowa, it is easy to show "flypaper effect" since b3(0.77) is larger than b1(0.29). However, in Georgia, b3(0.19) is smaller than b1(0.28), suggesting that the effect of money income on expenditure is greater than that of aids. It is a contradiction of "flypaper effect" in Georgia. In order to verify the puzzling results in Georgia, this paper scrutinizes b coefficient. Since b1 and b3 represents an elasticity of expenditure with regard to income and intergovernmental aid, respectively, the more information on the means for county data in Georgia is needed for verifying flypaper effect. As a result of derivation, Georgia also has the significant flypaper effect as well as Iowa does. The discussion is organized as follows. Section II presents how flypaper effect leads to expansion effect on government expenditures graphically. Section III reviews traditional and current empirical literatures on flypaper effect. Section IV simplifies the estimated expenditure function in order to show flypaper effect in Iowa and Georgia using 1990 data set. Section V investigates somewhat puzzling results in Georgia based on derivation of elasticities of expenditure with regard to income and intergovernmental grants. Section VI contains the summary and conclusion. "

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