Unfolding the Flypaper: The Effects of Intergovernmental Grants in an Open Local Economy

21 Pages Posted: 15 Feb 2006

See all articles by Daniel Hewitt

Daniel Hewitt

affiliation not provided to SSRN

Dennis R. Heffley

University of Connecticut - Department of Economics

Date Written: July 25, 1989

Abstract

Empirical studies of the effects of intergovernmental grants to localities do not support standard microeconomic predictions. Block grants have surprisingly large positive effects on public expenditures. Researchers have attributed this "flypaper effect" to imperfect information (fiscal illusion), bureaucratic self-interest (Leviathan motives), and flawed econometrics. In this paper, a three-sector, computable general equilibrium model of a local economy is used to explore the effects of block grants and matching grants. The paper demonstrates that without fiscal illusion or unresponsive bureaucrats, these grants can have large spending consequences. Fiscal adjustments, mobility, and capitalization effects explain the leveraged impact of intergovernmental grants.

JEL Classification: 325

Suggested Citation

Hewitt, Daniel and Heffley, Dennis R., Unfolding the Flypaper: The Effects of Intergovernmental Grants in an Open Local Economy (July 25, 1989). IMF Working Paper, Vol. , pp. 1-21, 1989. Available at SSRN: https://ssrn.com/abstract=884868

Daniel Hewitt (Contact Author)

affiliation not provided to SSRN

No Address Available

Dennis R. Heffley

University of Connecticut - Department of Economics ( email )

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States
860-486-4669 (Phone)
860-486-4463 (Fax)

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