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Title:The stimulative effects of intergovernmental grants and the marginal cost of public funds PDF Logo
Authors:Dahlby, Bev
Ferede, Ergete
Issue Date:2012
Series/Report no.:CESifo Working Paper: Public Finance 3863
Abstract:We test the hypothesis that the flypaper effect can arise if the recipient government finances part of its expenditures with a distortionary tax. We present a simple theoretical framework that shows how a lump-sum transfer stimulates the marginal expenditures of a recipient government through an income effect and a price effect. We test the predictions of this model using data on Canadian provincial expenditures and federal transfers to the provinces over the period 1981 to 2008. Our econometric results indicate that a $ 0.10 increase in a provincial government's marginal cost of public funds increases the stimulative effect of lump-sum grants by $ 0.32.
Subjects:intergovernmental grants
marginal cost of public funds
flypaper effect
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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