The flypaper sticks even when aid travels overseas

Abstract

This paper extends the current literature by considering the existence of the flypaper effect internationally, with donor countries supplying foreign aid to recipient countries. The flypaper effect refers to the empirical anomaly associated with intergovernmental grants stimulating government expenditures more than can be explained by a pure income effect. The results reveal evidence of flypaper behavior such that for recipient countries one dollar of foreign aid raises public spending by $0.21-$0.42, whereas an equal increase in domestic income raises government expenditures by only $0.09-$0.16. Furthermore, we exploit variation in political institutions across countries and find that the flypaper effect is most pronounced in less democratic countries and find no flypaper effect in more democratic countries. This suggests that government officials are more likely to behave as expected by the median voter model when they are held accountable. Furthermore, countries with proportional, rather than majority/plurality, voting mechanisms do not display flypaper behavior.