THE ILLUSION OF FISCAL ILLUSION - UNSTICKING THE FLYPAPER EFFECT

Recognizing that it is difficult to prove a negative, this paper marsh als evidence in support of the hypothesis that the widely documented f lypaper effect of federal grants to state and local governments is pur ely a statistical artifact. A review of previous studies and a monte c arlo investigation suggest that the use of an inappropriate functional form may generate an illusory flypaper effect. A local expenditure eq uation is then estimated in alternative specifications with ten years of state level data. Empirical results confirm the sensitivity of the flypaper effect to specification, and tests of fit unambiguously favor one functional form. That specification yields no statistical evidenc e of a flypaper effect.