Does Flypaper Effect Exist? New Evidence from Turkish Municipalities

Abstract

In this paper, we investigate the phenomenon of flypaper effect and its relation to the local tax effort, by using a new and detailed panel data set that consist of all province and district municipalities' fiscal data in Turkey between 1997 and 2005. We use fixed effects and dynamic panel data specific GMM estimators to obtain the results. We provide new evidence using an advanced technique which is firstly used to uncover flypaper effect in Turkey. According to our estimations, the flypaper effect does exist for the Turkish municipalities. This result is robust to various model specifications and econometric techniques. Turkish municipalities also experience substitution effect of unconditional grants on the revenue collection efforts.

A Different Approach to the Flypaper Effect: An Analysis of Metropolitan Municipalities' Borrowings in Turkey

“…The finding coincides with the results achieved in De Mello (2000), Bastida et al (2009), Köppl-Turyna and Pitlik (2016), Faulk andKillian (2017), andPadovani et al (2018). In addition, this finding supports the flypaper effect, which has been proven to be valid in municipalities in Turkey by Sağbaş and Saruç (2004), Aytaç (2015), Yaş and Akduğan (2015) and Acar (2019). With this effect, the expenditures of local administrations increase more than the own revenues of grants or the efforts of the executives to collect taxes decrease.…”

“…With this effect, the expenditures of local administrations increase more than the own revenues of grants or the efforts of the executives to collect taxes decrease. Acar (2019) reached both findings in his study. Therefore, the increase in expenditures and the decrease in revenues depending on the shares transferred from the general budget tax revenues will cause a budget deficit and the need for borrowing.…”

“…There was a significant and positive relationship between these variables at the 1% level. Thus, it can be stated that the shares transferred by the central administration in Turkey increase borrowing, similar to the preferences of the municipal administrators to increase expenditures or decrease revenues (Sağbaş and Saruç, 2004;Yaş and Akduğan, 2015;Acar, 2019). It can be stated that the flypaper effect emerges in terms of borrowing in Turkey.…”

“…Thus, whether there is a relationship between these two variables and grants has been widely researched in the literature (Heyndels and Smolders, 1994;Deller and Maher, 2005;Mehiriz and Marceau, 2014;Aritenang, 2020). Sağbaş and Saruç (2004), Aytaç (2015), Yaş and Akduğan (2015) and Acar (2019) tested this relationship in Turkey. These studies have concluded that the expenditure-increasing effects of the shares transferred from the general budget tax revenues in Turkey are more than the own revenues and that the efforts of the executives to collect their revenues decrease depending on the shares.…”

Sinek Kâğıdı Etkisi: “Gerçeklik” mi, “Efsane” mi? Türkiye Örneği

“…At the same time, it is concluded that capital expenditure has a positive effect on society welfare in district with extreme degree of fiscal decentralization. Yacoub and Lestari (2019) also found that the flypaper effect was valid for districts and cities in Kalimantan Island of Indonesia in the period 2013-2016. Acar (2019 reached the conclusion that there was the flypaper effect in Turkey and that the unconditional fiscal transfers had substitution effect on revenue collection efforts of municipalities through panel data set of municipalities in the period of 1997-2005. There are also studies on the symmetrical or asymmetrical structure of the flypaper effect.…”