On Confusing Caution and Greed

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Abstract
Several researchers who have studied the impact of unrestricted state and federal grants on local government spending have observed a "flypaper effect" in which the expenditure effect of such grants is larger than a comparable increase in community income. Conventional explanations of this effect rely heavily on assumptions of voter misperception or official manipulations of voters to induce a higher level of spending than would otherwise be approved. An alternate model is presented to argue that the flypaper effect arises from the uncertainty and instability of grant revenue and risk-averse behavior by local officials.

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