An Empirical Examination of the Grant Induced Price and Income Effects of Lump-Sum Intergovernmental Aid.
Date of Award
Doctor of Philosophy (PhD)
Geoffrey K. Turnbull
This work is concerned with the nature of fiscal illusion and its effect on local government spending. Fiscal illusion is hypothesized to be a source of the "flypaper effect." The flypaper effect is an empirical phenomenon of the asymmetric effects of income and intergovernmental aid on the level of local public spending in the context of demand models of the local fisc. Lump sum aid is observed to be more stimulative on the level of public expenditures than income (Gramlich and Galper 1973). As a method of explaining this phenomenon, tax-price and income illusion are incorporated into demand models of the local fisc (Oates (1979); Courant Gramlich and Rubinfeld (1979); Filimon, Romer, and Rosenthal (1980); Turnbull (1995); Holsey (1993)). This work provides both theoretical and empirical contributions to the growing body of literature on fiscal illusion. The theoretical contribution is a clarification of the parametric interdependence between income and price illusion. The relationship between income and price illusion has ramifications for estimation. The relationship between income and price illusion has ramifications for estimation. This paper contributes to the empirical literature by estimating local public expenditure functions using two panel data sets, one for county government spending and the other for state government spending. The results demonstrate that fiscal illusion is felt primarily through the traditional grant channels rather than Holsey's depiction of the income illusion channel.
Mitias, Peter Michael, "An Empirical Examination of the Grant Induced Price and Income Effects of Lump-Sum Intergovernmental Aid." (1997). LSU Historical Dissertations and Theses. 6397.