The Flypaper Effect and Desirable Legislative Changes to Local Government Financing Systems

Abstract

A substantial portion of local government funding in Poland comes from intergovernmental transfers. It may lead to the flypaper effect, which means that external revenues contribute to greater local government spending than locally-collected revenues. This study analyses how different revenue categories influenced local government spending in Poland between 2009 and 2018. Panel econometric models are used to test a hypothesis about whether the flypaper effect occurred in that period and to identify the potential causes. The results confirm to some extent that all three levels of local government were affected by the flypaper effect, and they point to intergovernmental transfers (general grants, specific grants, and shares of corporate income tax revenue) as the main causes. The research findings can be of use in reforming local government funding legislation in Poland and other countries, especially when the size of the public sector and public spending need to be reduced.