Unfolding the Flypaper: The Effects of Intergovernmental Grants in an Open Local Economy

International Monetary Fund

No 1989/058, IMF Working Papers from International Monetary Fund

Abstract: Empirical studies of the effects of intergovernmental grants to localities do not support standard microeconomic predictions. Block grants have surprisingly large positive effects on public expenditures. Researchers have attributed this “flypaper effect” to imperfect information (fiscal illusion), bureaucratic self-interest (Leviathan motives), and flawed econometrics. In this paper, a three-sector, computable general equilibrium model of a local economy is used to explore the effects of block grants and matching grants. The paper demonstrates that without fiscal illusion or unresponsive bureaucrats, these grants can have large spending consequences. Fiscal adjustments, mobility, and capitalization effects explain the leveraged impact of intergovernmental grants.

Keywords: WP; block grant effect; public goods; matching grant; fiscal policy; grant simulation; policy objective; grant program; grant parameter; choice problem; Property tax; Total expenditures; Public employment (search for similar items in EconPapers)
Pages: 22
Date: 1989-01-01
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