How sticky are local expenditures in Italy? Assessing the relevance of the flypaper effect through municipal data

An extensive literature analysed the impact of upper tier transfers on spending behaviour of lower level governments finding evidence of a flypaper effect , an overreaction to varying grants from upper tiers. Our work seeks to supplement a dearth of evidence for the Italian case by focusing on the responsiveness of municipal expenditures to State grants. We use a panel of almost 8,000 municipalities from 1999 to 2006. Budget data are matched with several other information sources, enabling us to investigate also the role played by some important political factors like the electoral cycle or the political strength of local cabinets. Application of panel data techniques with the use of instrumental variables and a dynamic setting highlights the presence of a sizeable flypaper effect and a significant role for political variables while the asymmetric response is not confirmed in all specifications.