Intergovernmental Transfers, Local Fiscal Policy, and the Flypaper Effect: Evidence from a German State

Thushyanthan Baskaran

FinanzArchiv: Public Finance Analysis, 2016, vol. 72, issue 1, 1-40

Abstract: I study how rule-based general-purpose transfers from a higher tier of government affect municipalities' expenditures and taxation. The data set covers 319 municipalities in the German state of Hesse over the period 2001-2010. For identification, I rely on discontinuities in the allocation formula for general-purpose transfers that the state government of Hesse pays to its municipalities. Exploiting these discontinuities to implement an instrumenal-variable design, I find evidence that Hessian municipalities use transfers to increase expenditures but not to reduce taxes. These results are consistent with the existence of a flypaper effect in German local fiscal equalization.

Keywords: intergovernmental transfers; local fiscal policy; population thresholds; flypaper effect (search for similar items in EconPapers)
JEL-codes: H70 H71 H72 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (17)

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DOI: 10.1628/001522108X14462054864882

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