Experiments on the Fly

53 Pages Posted: 13 Oct 2020

See all articles by Aleksandr Alekseev

Aleksandr Alekseev

University of Regensburg - Department of Economics and Econometrics

James Alm

Tulane University

Vjollca Sadiraj

Georgia State University

David L. Sjoquist

Georgia State University

Date Written: October 2020

Abstract

How do exogenous increases in resources to a government affect its expenditure decisions? Economic theory typically predicts that a lump-sum grant will have the same impact on government expenditures as an increase in income. However, empirical studies consistently find that government spending is stimulated far more by grants than by income; that is, grants have a
“flypaper effect” because the money “sticks where it hits”. We conduct a laboratory experiment that controls for the most important factors that have been suggested in explaining the existence of the flypaper effect. Our experimental design crosses four transfer delivery methods with three voting frameworks. We examine three payoff-equivalent transfer delivery methods, all relative to a fourth baseline treatment with no transfer: an increase in income, a subsidy (repayment) for expenditures on the public good, and a lump-sum grant. Our two alternative voting frameworks are voting over levels of expenditures and voting over changes with information on public good externalities, each relative to a third baseline treatment where voting is over changes from a default (reference) level of expenditures. We find robust evidence of a flypaper effect: both the subsidy and the lump-sum grant increase expenditures more than does an equivalent increase in income. Our results are largely consistent with, and explained by, theoretical models that rely upon behavioral economics.

Keywords: Laboratory experiment, intergovernmental grans, flypaper effect, reference dependence, public goods, incremental budgeting

JEL Classification: C9, H4, H8

Suggested Citation

Alekseev, Aleksandr and Alm, James and Sadiraj, Vjollca and Sjoquist, David L., Experiments on the Fly (October 2020). Andrew Young School of Policy Studies Research Paper Series No. 20-01, Available at SSRN: https://ssrn.com/abstract=3707757

Aleksandr Alekseev

University of Regensburg - Department of Economics and Econometrics ( email )

Universitaetsstrasse 31
D-93040 Regensburg
Germany

HOME PAGE: http://https://aalexee.com

James Alm

Tulane University ( email )

United States
5048628344 (Phone)

Vjollca Sadiraj

Georgia State University

35 Broad Street
Atlanta, GA 30303-3083
United States

David L. Sjoquist (Contact Author)

Georgia State University ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States
404-413-0246 (Phone)

HOME PAGE: http://frp.aysps.gsu.edu/sjoquist/index.html

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