The elusive flypaper effect

The flypaper effect is the common empirical result that lump-sum intergovernmental grants stimulate more local government spending than increases in private income which are theoretically equivalent. In this paper, four of the best-known explanations of the flypaper effect are tested, using data from Michigan school districts. None of these explanations are confirmed by the data. The cause of the flypaper effect is likely to be much more deeply rooted in the nature of local decision-making than is currently recognized.     

EFFECTS OF FEDERAL CONSTITUTIONAL GRANTS IN BRAZILIAN MUNICIPALITIES

The objective of the present study is to verify the flypaper effect of 476 Brazilian municipalities from 2005 to 2012, considering the new variables as instruments of grants. Political alignment, alignment of the party, and coalition of the mayor with the federal president and of the state governor were considered as instruments of grants. A municipal tax autonomy index was considered as a control variable, which represents the percentage of local taxes in the municipal total revenues. The results allow concluding that the flypaper effect exists in Brazilian municipalities and is intensified by the alignment of the representatives in the same way of theoretical literature (Hamilton 1983; Hines & Thaler 1995; Inman 2008) and previous empirical studies in Brazil. Moreover, evidences of higher flypaper effect were found in municipalities with low tax autonomy.     

FLYPAPER EFFECT INCORPORATING SPATIAL INTERDEPENDENCE

This paper examines the decentralization process in the state of Maharashtra. Among the states in India, Maharashtra's efforts at decentralization are regarded as a success story. Using cross‐section data for 243 urban local governments, the paper examines the flypaper effect, that is, the expenditure stimulus of grants from the state government to the urban governments. The significance of spatial factors has been highlighted in the study. The models have been estimated using spatial econometric techniques. Most of the estimated models show the presence of the flypaper effect.     

Is the tax administration just a money machine? Empirical evidence on redistributive politics

Personal income tax represents the main source of tax revenue in any developed country. In this paper, we analyse how efficiently this tax is administered in the Spanish case. While we find that the managerial (or net) efficiency of the tax administration was very high for the period 1993–2002 (95.9%), our main aim here is to identify the determinants of this. Interestingly, political factors are found to play a role. Specifically, the fear of losing a parliamentary seat in a region forces the tax authorities to reduce their efficiency in ensuring tax compliance in that region (“swing voter model”). Additionally, in those electoral districts where the central government obtains higher electoral support the efforts to collect taxes diminish (“core voter model”). However, the former political effect tends to disappear when the central government holds a sufficient majority in the central parliament. Thus, we find empirical evidence on redistributive politics in tax administration.     

Charging for public services: the case of utilities in Norwegian local governments

This paper empirically analyzes the determinants of utility charges using a panel data set for a sample of Norwegian local governments. There is strong evidence of revenue substitution in the sense that local governments increase their utility charges when other sources of revenue (lump-sum grants and regulated tax revenue) become more restricted. Moreover, local political institutions are shown to be important: a high share of socialist representatives in the local council leads to high utility charges, whereas a strong political leadership is able to keep utility charges low.     

Do Politics or Mayors' Demographics Matter for Municipal Revenue Expansion?

Abstract

This study examines whether political factors and mayors' demographics influence municipal success in expanding revenue. Data from forty Colombian municipalities over a 7-year period (1999–2005) are used to explore the relationship between mayoral demographics (age, sectorial experience and education level and type) and revenue expansion through state and national grants. Results reveal that the factors affecting approval of state grants differ from those influencing approval of national grants. When a mayor's political party is aligned with that of the governor, municipalities tend to secure more state, but not national, grants. Municipal features, such as population, local revenues and divided government, positively influence national, but not state grants. Not surprisingly, the stressful municipal context (presence of illegally armed guerrillas) negatively moderates the impact of mayors' demographics on approval of grants. If obtaining greater revenues implies greater social investment, this study suggests the importance of candidates' backgrounds when electing mayors, at least in the Colombian context.     

Regulation in a political economy: explaining limited commitment and the ratchet effect

Abstract. This paper shows that in a political economy with repeated elections governments that possess full commitment behave as if their commitment is limited. Two different endogenous versions of the ratchet effect obtain: If contracts of previous governments tie newly elected governments, governments are unable to resist renegotiation. If previous contracts do not bind new governments and taxation has a crowding–out effect, a ratchet effect occurs that is similar, but not identical to the standard ratchet effect that is due to intertemporal non–commitment. Social welfare may be higher in the latter case, when the governing party is allowed to use bonds. Received: March 14, 2000     

Party alternation,divided government,and fiscal performance within US States

The literature on US state government fiscal performance has examined the role of institutional factors such as budget rules and divided government, but has largely ignored the impact of party alternation. This paper primarily focuses on whether party alternation in the governor’s office affects fiscal performance. Our hypothesis is that frequent party changes create a political environment that impacts fiscal performance. To further assess the impact of party alternation on fiscal performance, we consider our primary hypothesis in conjunction with the degree of division that exists between the governor’s office and the legislature. Using panel data from 37 states between 1971 and 2000 we test the hypothesis that frequent party alternation can be expected to affect fiscal performance and find strong support for the hypothesis. An earlier version of this paper was presented at the 2005 Public Choice Society Meetings. The authors would like to thank the conference participants, William Shughart, Charles Register, Jocelyn Evans, John D. Jackson, Amihai Glazer, and two anonymous referees for their comments. We would also like to thank Craig R. Stiller for his help in the collection of data. Any remaining errors remain the responsibility of the authors.     

Effects of rent dependency on quality of government

This paper introduces quality of government rather than regime type as dependent variable in studies of political effects of natural resources. It consists of two parts. First, it argues for an effect of fiscal dependency of oil and gas rents on quality of government. Second, it finds significant, negative effects of oil and gas rent dependency on three empirical indicators of quality of government—low corruption, bureaucratic quality and legal impartiality—in a sample of 139 states in the period 1984–2006. The results hold for inclusion of control variables such as regime type, income, region and religion.     

How economic integration affects the vertical structure of the public sector

This paper investigates the impact of economic integration on the vertical structure of the public sector within a country. To tackle this issue we set up a model of fiscal federalism, where economic integration is assumed to affect central government tax revenues. The main findings are that when an increase of the impact of economic integration brings about a reduction in central government tax revenues, under certain conditions: (a) it reduces central government expenditure; (b) it reduces general government expenditure; (c) it increases local taxation; (d) it increases the degree of public sector decentralization. Quite interestingly, these results are consistent with different patterns of local public spending and grants to local government.     

Does military expenditure crowd out health-care spending? Cross-country empirics

The trade-off between military expenditure and public health spending has remained an unsettled empirical issue. This paper investigates whether military expenditure has crowded out public health spending in 116 countries (including a subsample of 87 non-OECD countries) over the period 2000–2017. Through our system generalized methods of moments (GMM) estimations, we find that military expenditure, whether it is measured on a per-capita basis or as a proportion of total government expenditure, has a positive impact on the demand for health care. Nonetheless, we find a significant crowding-out effect of military expenditure on domestic government health spending by taking into account government fiscal capacity. The evidence we present supports the long-standing view that military expenditure has a particular ability to compete government financial resources away from publicly funded health spending. By interacting the military expenditure variable with income per capita, we find that an increase in income per capita has neutralized the crowding-out effect of military expenditure on domestic government health spending – less well-off countries stand to suffer most, and wealthy ones stand to suffer least, from the crowding-out effect. The crowding-out effect is statistically more specific to middle- and low-income countries in our samples.

     

The response of decentralized health services to demand uncertainty and the role of political parties in the Spanish public health system

Decentralization of the public health system should lead to health resources being managed more in line with citizens’ preferences. A decentralized system is more flexible in that it can better adapt resources to local needs. Moreover, if regional political parties have responsibility for public health policies, citizens will be able to elect those parties whose positions are more in line with their preferences. However, the role of political parties in public health management has received little attention in the literature. Focusing on the decision to provide reserve service capacity to deal with demand uncertainty, we analyse whether there have been differences between central and decentralized health authorities in Spain and whether these can be explained to some extent by the way different political parties manage the trade-off between being able to cover demand and the economic costs involved. Using data on Spanish public hospitals for the period 1996–2006, we model the difference between observed and potential output using an output-oriented distance function. Reserve capacity is modelled as a function of demand uncertainty, economic costs and the political party in power. We find differences in the way resources are managed by central government and decentralized authorities, even within the same political party. We also find differences between the decentralized authorities themselves according to the political party in power. We conclude that decentralization of public health in Spain has provided regional political authorities with greater flexibility to manage reserve capacity in line with citizens’ needs and preferences.     

Competition for private capital and central grants: the case of Japanese industrial parks

Local governments invest in public infrastructure to develop their regions. When they depend on intergovernmental grants for local development and have opportunities to lobby upper-level governments for such grants, horizontal intergovernmental competition in lobbying activity may emerge in addition to competition over public infrastructure. This paper empirically examines the existence of these interactions between Japanese localities, by using data on the value of industrial parks as infrastructure provisions and on personnel interchanges between the central and local governments as a measure of lobbying activity. Our results suggest that a Japanese local government’s choice of the size of industrial parks and its invitation to central officers to act as a director on loan are positive responses to the neighboring local government’s policy choices. As the value of the industrial parks in a district is affected by the neighboring districts’ lobby activities and their industrial park values, we can interpret these results as evidence of inter-regional competition in these two dimensions, rather than control by the central government in this unitary state.     

Grants structure in an intergovernmental fiscal game

Abstract. Systems of intergovernmental grants change over time. We explain this observation in terms of political and economic shocks in a noncooperative game between federal and provincial governments. The effects on the equilibrium grants structure arising from political disagreement, fiscal burden, increased revenue instability, and federalistic behaviour are examined. Our results provide a new theoretical perspective on grants. We show that the role of matching grants may be to influence the pattern of social spending by provincial or state governments, while conditional lump-sum grants are used simultaneously to determine the composition of the tax burden across the levels of government. Received: January 2001 / accepted: April 2002 We are grateful for the helpful comments received from Richard Bird, Amihai Glazer, and two anonymous referees.     

The welfare effects of intergovernmental grants in an economy with independent jurisdictions

A general equilibrium model is presented of an economy where mobile and immobile households engage in decentralized market behavior and where immobile households control the expenditure and tax policy of each local government, subject to a local budget constraint. It is shown how central government grant policy (which is a formula with lump-sum, matching, and population elements) affects the general equilibrium of the system determined through market and local political decisions. The welfare effects of grants are discussed, with particular emphasis on distortions that may arise at lower levels of decision making that grants may be useful in (partially or completely) correcting.     

Are Related‐Party Sales Value‐Adding or Value‐Destroying? Evidence from China

Prior literature provides mixed and relatively little evidence on the economic consequences of related‐party transactions. We examine a hitherto underexplored issue of whether transactions among firms within the same business group increase or reduce firm value. Using a large sample of Chinese listed firms, we find that related‐party sales increase firm value. However, this value enhancement disappears for firms with (i) large percentage of parent directors, (ii) high government ownership, or (iii) tax avoidance incentives that often couple with management's rent extraction activities. Although we find that intragroup sales improve firm value in general, we also find that corporate insiders use intragroup sales to deprive value from minority shareholders. Overall, our findings highlight the interplay between ownership structure and tax avoidance incentives in determining the economic consequences of related‐party transactions.     

Explaining the Choice Among Regulatory Plans in the U.S. Telecommunications Industry

We investigate why different states in the United States choose different regulatory plans in their telecommunications industry. We present a simple theoretical model and an empirical analysis of the issue. We find that a state is more likely to replace rate-of-return regulation with incentive regulation when: (1) residential basic local service rates have historically been relatively high; (2) allowed earnings under rate-of-return regulation in the state have been either particularly high or particularly low; (3) the state's leaders tend to come from both major political parties, rather than from a single party; (4) the state's urban population is growing relatively rapidly; and (5) the bypass activity of competitors in the state is less pronounced.     

Two faces of corporate lobbying: Evidence from the pharmaceutical industry

In this study, we examine how political connections increase firms’ innovation performance. By examining firm-level lobbying activities, we find that political connections lead to a greater number of medical breakthroughs among pharmaceutical firms in our sample. We then examine the underlying ways that political connections enhance innovation among medical firms. Using hand-collected data on government subsidies, we find that politically connected firms have a higher chance of receiving subsidies from federal, state, or local government agencies. These government subsidies enhance medical innovation by insulating managers from short-term threats and mitigate their career concerns by creating a “failure tolerant” environment. Overall, we show that connections between firms and politicians come with increased innovation outcomes.     

Does government ideology influence budget composition? Empirical evidence from OECD countries

This paper examines whether government ideology has influenced the allocation of public expenditures in OECD countries. I analyze two datasets that report different expenditure categories and cover the time periods 1970–1997 and 1990–2006, respectively. The results suggest that government ideology has had a rather weak influence on the composition of governments’ budgets. Leftist governments, however, increased spending on “Public Services” in the period 1970–1997 and on “Education” in the period 1990–2006. These findings imply, first, that government ideology hardly influenced budgetary affairs in the last decades, and thus, if ideology plays a role at all, it influences non-budgetary affairs. Second, education has become an important expenditure category for leftist parties to signal their political visions to voters belonging to all societal groups.     

Politics in wage setting: does government colour matter?

This paper studies the relationship between wage formation and the political colour of the government in an economy with a centralized wage bargaining system. Ideological, organizational and personal ties between the central trade union and the social democratic political party suggest that the trade union may behave significantly different in wage negotiations under a social democratic than under a conservative government. Using time series data for Norway, we estimate that changing from a conservative to a social democratic central government significantly reduces manufacturing wages and makes wages more responsive to unemployment. This result is consistent with a wage bargaining model augmented by political preferences of the union leaders and suggests that the effect of bargaining coordination depends on the political colour of the government. The estimated effects are both robust with respect to model specification and stable over time. We are grateful to Fredrik Wulfsberg, participants at seminars in Trondheim and Oslo, and an anonymous referee for valuable comments.