Identifying the Flypaper Effect in the Presence of Spatial Dependence: Evidence from Education in China’s Counties

Yu, Yihua and Wang, Jing and Tian, Xi (2013): Identifying the Flypaper Effect in the Presence of Spatial Dependence: Evidence from Education in China’s Counties. Forthcoming in: Growth and Change

Abstract

In the context of China without a median voter system, this study examines whether the “flypaper effect”, an unconditional lump-sum grant from the upper governments to the county governments increases spending in a greater proportion than an equivalent rise in local income, holds true in China. Using China’s county-level education data during 2007, the models have been estimated using a spatial econometric technique that accounts for spatial interaction behavior on public education expenditure across local governments. We find that, in the presence of spatial interdependence, there is no evidence of a “flypaper effect” when different spatial weighting schemes and the endogeneity problem of education grants are accounted for. Rather, the “anti-flypaper effect” is found. Important policy implications are drawn for China’s fiscal decentralization reform.

• Item Type: MPRA Paper
• Language: English
• Keywords: Flypaper effect, Grants, Local government expenditure, Spatial econometrics
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H71 - State and Local Taxation, Subsidies, and Revenue; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H77 - Intergovernmental Relations ; Federalism ; Secession; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R12 - Size and Spatial Distributions of Regional Economic Activity

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