Equalization Transfers and the Pattern of Municipal Spending: An Investigation of the Flypaper Effect in Germany

Sebastian Langer () and Artem Korzhenevych ()
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Sebastian Langer: Leibniz Institute of Ecological Urban and Regional Development (IOER)

Annals of Economics and Finance, 2019, vol. 20, issue 2, 737-765

Abstract: We investigate how lump-sum equalization transfers affect expenditures and taxes in the municipalities of the largest German state North RhineWestphalia. In general, those general-purpose transfers cannot be treated as exogenous variables. Thus, for the identification of causal effects, two exogenous adjustments in the transfer allocation formula are used as instrumental variables. Findings suggest the existence of the "flypaper effect" - municipalities use transfers to increase expenditures but do not reduce tax rates. Extra money from transfers is mainly used to finance social expenditures and public facilities. A set of robustness checks, including a spatial dependence model, confirm the results.

Keywords: Flypaper effect; Local government expenditure; Transfers; Local taxation (search for similar items in EconPapers)
JEL-codes: H21 H70 H71 H72 H77 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2019:v:20:i:2:langerkorzhenevych

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