Asymmetries in the flypaper effect: empirical evidence for the Flemish municipalities

Recent empirical work on US governments indicates an asymmetry in the flypaper effect: the elasticity of public spending with respect to changes in grants differs significantly for positive and negative changes. Using a panel of data on Flemish municipalities covering the period 1989-1996, we also find clear evidence of asymmetrical reactions. More precisely, the results suggest the presence of a fiscal replacement type of asymmetry: when grants grow, municipalities spend most of the additional revenue. However, when grants fall, spending is unaffected and municipalities compensate the loss through additional taxation.