Next Article in Journal
Effect of Saccharomyces cerevisiae Yeast-Based Supplement on Human Milk Oligosaccharide Concentration and Mothers’ Perception of Breast Milk Supply: A Randomized Placebo-Controlled Trial
Previous Article in Journal
Skills and Motivation Factors of Generation Z for Creating Successful Employer Branding Strategies
 
 
Font Type:
Arial Georgia Verdana
Font Size:
Aa Aa Aa
Line Spacing:
Column Width:
Background:
Proceeding Paper

Model Misspecification as the Causes of Flypaper Effect †

Department of Finance, Faculty of Economics, Technical University of Košice, 040 01 Košice, Slovakia
Presented at the Digital Transformation in Business: Challenges and New Opportunities, West Mishref, Kuwait, 17 November 2022.
Proceedings 2023, 85(1), 15; https://doi.org/10.3390/proceedings2023085015
Published: 10 March 2023

Abstract

:
The aim of this paper is to investigate the relationship between the Fly-paper effect (FPE) and possible errors in the specification of econometric models used in the empirical analysis of FPE. Using desk research method to gathering and analyzing scientific papers considering different aspects of misspecification problem, it was executed classification of papers in three groups depending on the type of errors in the model specification: incorrect functional form, incorrect choice of explanatory variables and incorrect statements about stochastic error of model. Research results showed that the wrong specification of the model affects the presence or absence of FPE) and the size of the FPE. The originality of this paper is reflected in the original classification of scientific papers devoted to the problem of misspecification of regression models used for econometric modeling of FPE. The contribution of this work is reflected in the identification of possible errors in the specification of the model for the empirical analysis of FPE and their implications on the properties of the parameter estimates of the used model.

1. Objectives

Although the Flypaper effect (a phenomenon that claims that transfers from the central government to local government have a larger effect on local government expenditure than an equivalent increase in own local revenues) was discovered almost 50 years ago, it is very intensively studied in the literature of fiscal federalism and local public finance, both from a theoretical and even more from an empirical point of view [1,2,3,4,5,6,7,8,9]. The aim of this paper is to investigate the relationship between the Flypaper effect (FPE) and possible errors in the specification of econometric models used in the empirical analysis of FPE.

2. Methodology

There are a large number of scientific papers considering different aspects of the misspecification problem. In this paper, a desk research method was used to gather and analyze those papers, classifying them into three groups depending on the type of errors in the model specification: incorrect functional form, incorrect choice of explanatory variables (omitting relevant explanatory variables or including irrelevant variables) and incorrect statements about stochastic error of the model [10,11,12,13,14,15,16,17,18,19,20].

3. Results

Research results showed that misspecification of the regression model implies (a) biased and ineffective parameter estimates, (b) unbiased but ineffective parameter estimates or (c) biased parameter estimates depending on whether the source of error in the model specification is (a) omitting relevant explanatory variables, (b) including irrelevant variables, or (c) an incorrect functional form. Moreover, the results of the research showed that incorrect specification of the model affects both the manifestation (the presence or absence of FPE) and the size of the FPE.

4. Implications

Examination of the impact of misspecification of the model on the empirical results—if FPE exists, if FPE is symmetric, what the size of FPE is—has particular importance for econometric modeling of FPE considering the importance of information on whether total local expenditures or some items of local expenditures in a specific country or specific region behave according to the FPE model or not, which is especially important not only for transfer policy but for fiscal policy as well.

5. Originality Value

The originality of this paper is reflected in the original classification of scientific papers devoted to the problem of misspecification of regression models used for econometric modeling of FPE, through pointing out the implications of different types of errors in model specification, and highlighting the importance of model specification tests and other elements of strategy in the process of choosing an appropriate model for empirical analysis of FPE.

6. Contribution

The contribution of this work is reflected in the identification of possible errors in the specification of the model for the empirical analysis of FPE and their implications on the properties of the parameter estimates of the used model. It also highlights the implications of the wrong specification of the model on the manifestation of FPE. Finally this work explains how it may contribute to a better understanding of the phenomenon of FPE.

Funding

This research received no external funding.

Institutional Review Board Statement

Not applicable.

Informed Consent Statement

Not applicable.

Conflicts of Interest

The author declares no conflict of interest.

References

  1. Acosta, P. The “flypaper effect” in presence of spatial interdependence: Evidence from Argentinean municipalities. Ann. Reg. Sci. 2008, 44, 453–466. [Google Scholar] [CrossRef]
  2. Aragon, F.M. The Flypaper Effect and Costly Tax Collection. 2010. Available online: https://www.researchgate.net/publication/228705968_The_Flypaper_Effect_and_Costly_Tax_Collection (accessed on 3 June 2022).
  3. Hamilton, B.W. The flypaper effect and other anomalies. J. Public Econ. 1983, 22, 347–361. [Google Scholar] [CrossRef]
  4. Hines, J.R.; Thaler, R.H. The flypaper effect. J. Econ. Perspect. 1995, 9, 217–226. [Google Scholar] [CrossRef]
  5. Inman, R.P. The Flypaper Effect (No. w14579); National Bureau of Economic Research: Cambridge, MA, USA, 2008. [Google Scholar]
  6. Megdal, S.B. The Flypaper Effect Revisited: An Econometric Explanation. Rev. Econ. Stat. 1987, 69, 347. [Google Scholar] [CrossRef]
  7. Mattos, E.; Rocha, F.; Arvate, P. Flypaper effect revisited: Evidence for tax collection efficiency in Brazilian municipalities. Estud. Econômicos 2011, 41, 239–267. [Google Scholar] [CrossRef]
  8. Melo, L. The Flypaper Effect under Different Institutional Contexts: The Colombian Case. Public Choice 2002, 111, 317–345. [Google Scholar] [CrossRef]
  9. Yasin, A.C.A.R. Does the flypaper effect exist? New evidence from turkish municipalities. Sosyoekonomi 2019, 27, 55–68. [Google Scholar]
  10. Bailey, S.J.; Connolly, S. The flypaper effect: Identifying areas for further research. Public Choice 1998, 95, 335–361. [Google Scholar] [CrossRef]
  11. Becker, E. The illusion of fiscal illusion: Unsticking the flypaper effect. Public Choice 1996, 86, 85–102. [Google Scholar] [CrossRef]
  12. Case, A.C.; Rosen, H.S.; Hines, J.R., Jr. Budget spillovers and fiscal policy interdependence: Evidence from the states. J. Public Econ. 1993, 52, 285–307. [Google Scholar] [CrossRef]
  13. Gramlich, E.M.; Galper, H.; Goldfeld, S.; McGuire, M. State and local fiscal behavior and federal grant policy. Brook. Pap. Econ. Act. 1973, 1973, 15. [Google Scholar] [CrossRef] [Green Version]
  14. Gordon, N. Do federal grants boost school spending? Evidence from Title I. J. Public Econ. 2004, 88, 1771–1792. [Google Scholar] [CrossRef] [Green Version]
  15. Kakamu, K.; Yunoue, H.; Kuramoto, T. Spatial patterns of flypaper effects for local expenditure by policy objective in Japan: A Bayesian approach. Econ. Model. 2014, 37, 500–506. [Google Scholar] [CrossRef]
  16. Knight, B. Endogenous Federal grants and crowd-out of state government spending: Theory and evidence from the federal highway aid program. Am. Econ. Rev. 2002, 92, 71–92. [Google Scholar] [CrossRef] [Green Version]
  17. Lim, S.; Lee, S.; Kim, P. Asymmetry in the fly-paper effect of the national subsidy in Korea. J. Asia Pac. Econ. 2017, 22, 560–574. [Google Scholar] [CrossRef]
  18. Mehiriz, K.; Marceau, R. The Flypaper and Asymmetric Effects of Intergovernmental Grants to Quebec Municipalities. Public Budg. Financ. 2014, 34, 85–102. [Google Scholar] [CrossRef]
  19. Moffitt, R.A. The effects of grants-in-aid on state and local expenditures: The case of AFDC. J. Public Econ. 1984, 23, 279–305. [Google Scholar] [CrossRef]
  20. Wyckoff, P.G. A bureaucratic theory of flypaper effects. J. Urban Econ. 1988, 23, 115–129. [Google Scholar] [CrossRef] [Green Version]
Disclaimer/Publisher’s Note: The statements, opinions and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of MDPI and/or the editor(s). MDPI and/or the editor(s) disclaim responsibility for any injury to people or property resulting from any ideas, methods, instructions or products referred to in the content.

Share and Cite

MDPI and ACS Style

Mali, S. Model Misspecification as the Causes of Flypaper Effect. Proceedings 2023, 85, 15. https://doi.org/10.3390/proceedings2023085015

AMA Style

Mali S. Model Misspecification as the Causes of Flypaper Effect. Proceedings. 2023; 85(1):15. https://doi.org/10.3390/proceedings2023085015

Chicago/Turabian Style

Mali, Siniša. 2023. "Model Misspecification as the Causes of Flypaper Effect" Proceedings 85, no. 1: 15. https://doi.org/10.3390/proceedings2023085015

Article Metrics

Back to TopTop