What is the flypaper effect in simple terms?

Grants to local governments raise their spending much more than the same rise in residents' income would.

Why is it called flypaper?

Money sticks where it lands, like a fly on flypaper.

Flypaper Effect

📈 Economics By CampusDown Wiki Editorial Team Last updated October 27, 2026 Views 5

The flypaper effect is the finding that a grant from a higher-level government raises local government spending much more than an equivalent rise in residents' private income would. The name reflects the idea that 'money sticks where it hits', like a fly on flypaper.

Contents

1. Concept
2. Why it happens
3. Evidence and critiques
4. FAQ
5. References

Concept

Standard theory says an unconditional grant should act like an equal rise in residents' income, since voters would raise spending only as much as they want and return the rest as tax cuts. Yet studies reviewed by Gramlich (1977) found that a grant dollar raised spending far more. Courant, Gramlich and Rubinfeld (1979) summed it up as 'money sticks where it hits'. It is a classic puzzle in fiscal federalism.

Why it happens

Filimon, Romer and Rosenthal (1982) argued that bureaucrats and politicians know more about grants than voters and use this to expand budgets. Hines and Thaler (1995) linked it to mental accounting: grant money is labelled 'public spending money'. Fiscal illusion about the effective tax price is another proposed cause.

Evidence and critiques

Bailey and Connolly (1998) showed estimates vary widely with method. Knight (2002) found that once grant allocation is treated as endogenous, the effect disappears and crowd-out appears. Inman (2008) concluded the effect varies by place and institutions, with political explanations central.

FAQ

What is the flypaper effect in simple terms?: Grants to local governments raise their spending much more than the same rise in residents' income would.
Why is it called flypaper?: Money sticks where it lands, like a fly on flypaper.

Sources reviewed: 2026-10-26

References

Gramlich, E. M. (1977). Intergovernmental grants: A review of the empirical literature. In W. E. Oates (Ed.), The political economy of fiscal federalism (pp. 219–239). Lexington Books. A classic review highlighting the flypaper effect in grant studies.
Courant, P. N., Gramlich, E. M., & Rubinfeld, D. L. (1979). The stimulative effects of intergovernmental grants: Or why money sticks where it hits. In P. Mieszkowski & W. H. Oakland (Eds.), Fiscal federalism and grants-in-aid (pp. 5–21). Urban Institute. The source of 'money sticks where it hits'.
Filimon, R., Romer, T., & Rosenthal, H. (1982). Asymmetric information and agenda control: The bases of monopoly power in public spending. Journal of Public Economics, 17(1), 51–70. Explains the effect through bureaucratic information advantages.
Hines, J. R., & Thaler, R. H. (1995). Anomalies: The flypaper effect. Journal of Economic Perspectives, 9(4), 217–226. A behavioural-economics account linked to mental accounting.
Bailey, S. J., & Connolly, S. (1998). The flypaper effect: Identifying areas for further research. Public Choice, 95(3–4), 335–361. Reviews explanations and measurement issues.
Knight, B. (2002). Endogenous federal grants and crowd-out of state government spending: Theory and evidence from the federal highway aid program. American Economic Review, 92(1), 71–92. Shows the effect can vanish once grant endogeneity is addressed.
Inman, R. P. (2008). The flypaper effect (NBER Working Paper No. 14579). National Bureau of Economic Research. A comprehensive modern survey of theory and evidence.

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This article was last updated on October 27, 2026. It is based on widely recognized original works and textbooks; when citing it in a paper, please check the original sources listed in the references.