Unsticking the flypaper effect in an uncertain world

Carlos Vegh and Guillermo Vuletin

Journal of Public Economics, 2015, vol. 131, issue C, 142-155

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.

Keywords: Flypaper effect; Uncertainty; Portfolio theory; Insurance; Precautionary saving; Incomplete markets (search for similar items in EconPapers)
JEL-codes: E21 E62 H62 H77 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0047272715001498
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Unsticking the Flypaper Effect in an Uncertain World (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:131:y:2015:i:c:p:142-155

DOI: 10.1016/j.jpubeco.2015.09.001

Access Statistics for this article

Journal of Public Economics is currently edited by R. Boadway and J. Poterba

More articles in Journal of Public Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().