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Abstract:

Development Discussion Paper
The Flypaper Effect Revisited
Fernando Aragon
January 2009
Paper No' EOPP 004:
Full Paper (pdf)

JEL Classification: H71; H77


Tags: flypaper effect; intergovernmental transfers; public finance; fiscal decentralization

This paper argues that there is nothing anomalous about the flypaper effect. I develop a simple median voter model of government spending with costly tax collection that predicts the flypaper effect and provide a quantifiable measure of its magnitude. Using the model insights and previous estimates, I show that a tax rate between 8% to 16% would account for the flypaper effect observed in U.S. subnational governments.