The Flypaper Effect in Germany: An East-West Comparison

Artem Korzhenevych () and Sebastian Langer

No 10/16, CEPIE Working Papers from Technische Universität Dresden, Center of Public and International Economics (CEPIE)

Abstract: We investigate the effect of general-purpose transfers on different expenditure categories and tax rates in the municipalities of Saxony (eastern Germany) and North Rhine-Westphalia (western Germany). Findings from the panel data analysis suggest the existence of the "flypaper effect" - municipalities use transfers to increase expenditures but do not reduce taxes. For most expenditure subcategories the estimated coefficients are alike, suggesting similarity of spending priorities in the two federal states despite the differences in the transfer dependency. Targeted support of eastern municipalities could potentially explain few identified differences in the spending behavior.

Keywords: Flypaper Effect; Local Government Expenditure; Transfers to Municipalities; Local Taxation (search for similar items in EconPapers)
JEL-codes: H21 H70 H71 H72 H77 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-pbe, nep-pub and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tudcep:1016

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