Flypaper Effect

Abstract

The flypaper effect results when a dollar of exogenous grants-in-aid leads to significantly greater public spending than an equivalent dollar of citizen income: money sticks where it hits. Viewing governments as agents for a representative citizen voter, this empirical result is an anomaly. Four alternative explanations have been offered. First, it is a data problem; exogenous aid is mismeasured. Second, it is an econometric problem; important explanators of spending correlated with aid or income are excluded from the specification. Third, it is a specification problem; the representative citizen misperceives aid and the rational voter model misses this point. The empirical evidence suggests none of these explanations is sufficient. A fourth explanation seems most promising: it is politics. Rather than an anomaly, the flypaper effect is best seen as an outcome of political institutions and the associated incentives of elected officials.