Unsticking the flypaper effect using distortionary taxation

Carlos A. Vegh and Guillermo Vuletin
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Carlos A. Vegh: Johns Hopkins University y NBER

Económica, 2016, vol. 62, 185-237

Abstract: The flypaper effect is a widely-documented puzzle whereby the propensity of subnational governmental units to spend out of unconditional transfers is higher than the propensity to spend out of private income. Building on previous insights in the literature that rationalize this puzzle using costly taxation, we develop a simple optimal fiscal policymodel with distortionary taxation that generates two novel and testable implications: (i) there should be a positive association between the degree of the flypaper effect and the level of the tax rate, and (ii) the flypaper effect should be larger the lower the elasticity of substitution between private and public spending and, in fact, should vanish for very high degrees of substitution. We show that these hypotheses hold for argentinean provinces and brazilian states.

Keywords: flypaper effect; distortionary taxation; tax rates; substitutability between private and public spending; congestion of public goods. (search for similar items in EconPapers)
JEL-codes: H21 H22 H41 H42 H62 H77 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Unsticking the flypaper effect using distortionary taxation (2016)
Working Paper: Unsticking the Flypaper Effect Using Distortionary Taxation (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:akh:journl:606

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