Identifying the Flypaper Effect in the Presence of Spatial Dependence: Evidence from Education inChina's Counties

Abstract

AbstractIn the context ofChina without a median voter system, this study examines whether the “flypaper effect,” an unconditional lump‐sum grant from the upper governments to the county governments increases spending in a greater proportion than an equivalent rise in local income, holds true inChina. UsingChina's county‐level education data during 2007, the models have been estimated using a spatial econometric technique that accounts for spatial interaction behavior on public education expenditure across local governments. We find that, in the presence of spatial interdependence, there is no evidence of a “flypaper effect” when different spatial weighting schemes and the endogeneity problem of education grants are accounted for. Rather, the “anti‐flypaper effect” is found. Important policy implications are drawn forChina's fiscal decentralization reform.