A predictive index for the flypaper effect

Abstract

It is well established that lump-sum public grants boost local government spending more than an equivalent increase in private income, the flypaper effect. One shortcoming of the related literature is that it presumes all communities have an identical propensity to consume from an intergovernmental grant. This paper is one attempt to allow for a heterogeneous response. The working conjecture is that government expenditure on administrative overhead is a gauge of voter control over fiscal decisions. High overhead spending implies a lower provision of public services and a stronger role for revenue-maximizing forces in the budget-setting process. As such, the flypaper effect should be more marked in high overhead communities. An overhead index is applied to a sample of Pennsylvania communities in the Philadelphia metropolitan area. It is difficult to understand these governments' spending propensities from various windfall revenues without the help of the overhead index, supportive evidence for this approach. Because overhead data is widely available, the technique here can be used to address important policy questions such as predicting variations in state government responses to the recently created lump-sum welfare grants.