Abstract
In this paper, we analyze how public spending responds to income and intergovernmental fiscal transfer shocks in China. Similar to federations around the world, we find the flypaper effect at the provincial level since the country became a de facto federation in 1980. Before 1980 we find what we define as the teflon effect at the central government level. We rationalize the latter regularity using collection costs/distortionary taxation arguments
Highlights
The flypaper effect is an empirical regularity that refers to the greater responsiveness of subnational government spending to increases in unconditional intergovernmental transfers than to increases in private income
Before 1980 we find what we define as the teflon effect at the central government level
Paper effect at the provincial level after 1980, before 1980 we find what we define as the teflon effect at the central government level
Summary
The flypaper effect is an empirical regularity that refers to the greater responsiveness of subnational government spending to increases in unconditional intergovernmental transfers (hereafter, fiscal transfers) than to increases in private income. The catchy term “flypaper effect” aims to visualize the idea that money sticks where it hits: money from the private sector (i.e., from private income) tends to be spent in the private sector rather than being taxed away, while money from the public sector (i.e., from fiscal transfers) tends to be spent by the public sector rather than being rebated to citizens This well-known regularity is observed in many federations and at various levels of subnational government. The term teflon effect aims to visualize the idea that, contrary to the flypaper effect, money tends to slide from where it hits: money from the private sector (i.e., from private income) is taxed and mostly allocated to public spending, while money from the public sector (i.e., from provincial fiscal transfers) tends not to be spent and, 3The estimated coefficient for population density would become negative if year dummies were not included.
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