Marko Köthenbürger: KOF, ETH Zurich

"Flypaper Effect in Municipal Finance: A Regression Kink Design"

Abstract

We analyze the existence of a flypaper effect in local public finance. Kinks in the transfer schedule in the Canton of Vaud in Switzerland allow us to apply a Regression Kink Design and to estimate the causal impact of transfers on municipal expenditures and tax rates.

Consistent with the literature, we find robust evidence that ``money sticks where it lands'' i.e. transfers have a positive local average treatment effect (LATE) on municipal expenditures, while leaving the revenue side unchanged. Moreover, by studying the heterogeneity of policy responses to transfers, we observe a ``double'' flypaper effect. It appears that money sticks even more where it used to land in the past.