Fiscal Illusion and the Australian Local Government Grants Process: How Sticky Is the Flypaper Effect?

Andrew Worthington and Brian Dollery (bdollery@une.edu.au)

Public Choice, 1999, vol. 99, issue 1-2, 13 pages

Abstract: It has been argued that evidence supporting the widely documented flypaper effect is a statistical artifact; more specifically that previous studies are compromised by the use of inappropriate functional forms and the endogeneity of intergovernmental grant programs. While the first issue may be resolved with careful econometric testing, the second requires the incorporation of institutional constraints into governmental expenditure equations. Combining Australian local government expenditure equations and intergovernmental grant parameters, the flypaper controversy is analyzed. Empirical results confirm the sensitivity of the flypaper effect to specification and tests of fit unambiguously favor one functional form. That specification yields no evidence of a flypaper effect in the Australian institutional milieu. Copyright 1999 by Kluwer Academic Publishers

Date: 1999
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