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
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Citations: View citations in EconPapers (21)
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Working Paper: Unsticking the Flypaper Effect in an Uncertain World (2015) 
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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
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