Mexican Municipalities and the Flypaper Effect

Abstract

We investigate the phenomenon of flypaper effect and its relationship with the local tax effort by using a panel data comprising approximately 48 percent of the Mexican municipalities. Our estimations based on the fixed effect and difference GMM estimators confirm the existence of flypaper effect. Moreover, we find evidence to suggest that the richer municipalities are likely to experience substitution effect, i.e., the lower levels of tax effort. We also find that the magnitude of the flypaper effect is a decreasing function of the economic wellbeing of municipalities. This calls for an overhaul of the allocation mechanism of unconditional grants to the Mexican municipalities. Public Budgeting & Finance / Fall 2011

The Flypaper and Asymmetric Effects of Intergovernmental Grants to Quebec Municipalities

“…Concerning the utility function, empirical studies generally use municipalities' socio‐economic characteristics as a proxy for the preferences of the median voter (Mendes and Sampaio ; Nesbit and Kreft ; Cardenas and Sharma ). To control the effects of municipalities' socio‐economic characteristics, we have taken into account population size, age structure, and unemployment rate.…”

“…Several studies have shown that the effect of unconditional grants on local governments' expenditures is greater than the effect of the median voter income (Heyndels ; Gamkhar ; Levaggi and Zanola ; Deller and Maher ; Brooks and Phillips ; Lago‐Peñas ; Nesbit and Kreft ; Acosta ; Cardenas and Sharma ). This anomaly, known as the flypaper effect, has led to considerable research attempting to understand the gap between the predictions of the classic theory of public finance and the findings of empirical studies.…”

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“…The second specification test involves a Sargan test of exogeneity of instruments, which basically tests the null hypothesis of overall validity of the instruments. Failure to reject this null hypothesis ratifies the validity of instruments (see, for example, Cárdenas and Sharma, 2011;Dutt, 2009;Fajnzylber, Lederman and Loayza, 2002;Sharma, 2015). 4 Thus, we estimate the transformed equation, which is obtained by taking the first differences:…”

Las remesas y los resultados del mercado de trabajo. Análisis basado en datos de México

“…La segunda prueba de la especificación es una prueba de Sargan sobre la exogeneidad de los instrumentos, que esencialmente examina la hipótesis nula de validez general de los instrumentos. Si no se rechaza esta hipótesis nula se ratifica la validez de los instrumentos (véase, por ejemplo, Cárdenas y Sharma, 2011;Dutt, 2009;Fajnzylber, Lederman y Loayza, 2002;y Sharma, 2015)…”