The aim of this note is to show that the fiscal illusion model of Wallace Oates
unambiguously predicts a flypaper effect. The original contribution does not reach
this result because equal increases in the lump-sum grant and the income of the
median voter are compared. When the correct comparison is made, between a dollar
increase in the lump-sum grant and an increase in the income of the median voter
equal to his or her tax share, the Slutsky equation of the model implies that the
flypaper effect is unambiguous.
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References
1.
Bradford, David F., and Wallace E. Oates.1971. Towards a predictive theory of intergovernmental grants. American Economic Review61:440-8.
2.
Fisher, Ronald C.1982. Income and grant effects on local expenditure: The flypaper effect and other difficulties. Journal of Urban Economics12:324-45.
3.
Gramlich, Edward M., and Harvey Galper.1973. State and local fiscal behavior and federal grant policy. Brookings Papers on Economic Activity1:15-58.
4.
Oates, Wallace E.1979. Lump-sum intergovernmental grants have price effects . In Fiscal federalism and grants in aid, edited by Peter Mieszkowski and William H. Oakland.Washington, DC: The Urban Institute.
