The Flypaper Effect is not a Puzzle

Martin Besfamille, Nicolás Grosman and Pablo Sanguinetti

No 464, Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile.

Abstract: This note provides, in the context of an example, a new theoretical explanation of the flypaper effect by incorporating dynamic stochastic features into the conventional framework of local public finances. Under these circumstances, the flypaper effect is not an anomaly, but a natural optimizing behavior within the “traditional theory of grants-in-aid”. When shocks to intergovernmental transfers are more permanent than those affecting private income, an increase in intergovernmental transfers shifts public goods provision upward much more than an equivalent change in private income.

JEL-codes: H71 H72 H77 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:ioe:doctra:464

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