The stimulative effects of intergovernmental grants and the marginal cost of public funds

Arbeitspapier

We test the hypothesis that the flypaper effect can arise if the recipient government finances part of its expenditures with a distortionary tax. We present a simple theoretical framework that shows how a lump-sum transfer stimulates the marginal expenditures of a recipient government through an income effect and a price effect. We test the predictions of this model using data on Canadian provincial expenditures and federal transfers to the provinces over the period 1981 to 2008. Our econometric results indicate that a $ 0.10 increase in a provincial government's marginal cost of public funds increases the stimulative effect of lump-sum grants by $ 0.32.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 3863

Classification and Topics

• Classification: Wirtschaft ; State and Local Budget and Expenditures ; Intergovernmental Relations; Federalism; Secession
• Subject: intergovernmental grants ; marginal cost of public funds ; flypaper effect ; Flypaper-Effekt ; Finanzausgleich ; Öffentliche Ausgaben ; Schätzung ; Kanada

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dahlby, Bev ; Ferede, Ergete
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/61025
• Last update: 10.03.2025, 11:42 AM CET