How sticky are local expenditures in Italy? Assessing the relevance of the “flypaper effect” through municipal data

Abstract

An extensive literature analyses the impact of upper-tier transfers on the spending behaviour of lower level governments. According to the median voter framework, a transfer from the centre should act as a lump sum grant to residents and thus be spent by jurisdictions in the same proportion as residents are willing to spend their own money on public goods and services. But the actual local expenditure response to central government transfers is stronger than predicted by the theory, giving rise to the “flypaper effect”. Using the database on municipal accounts, and various other information sources, this work aims at assessing the size of the effect for Italian municipalities and the symmetry in the local expenditure response to central government transfers. Our dataset enables us also to investigate the role of some political factors. We find a sizeable effect and a remarkable asymmetric response of municipal expenditures to central government transfers as well as a significant role for political variables.flypaper effect, intergovernmental transfers, fiscal federalism