Identifying the Flypaper Effect in the Presence of Spatial Dependence: Evidence from Education in C hina's Counties

In the context of C hina without a median voter system, this study examines whether the “flypaper effect,” an unconditional lump‐sum grant from the upper governments to the county governments increases spending in a greater proportion than an equivalent rise in local income, holds true in C hina. Using C hina's county‐level education data during 2007, the models have been estimated using a spatial econometric technique that accounts for spatial interaction behavior on public education expenditure across local governments. We find that, in the presence of spatial interdependence, there is no evidence of a “flypaper effect” when different spatial weighting schemes and the endogeneity problem of education grants are accounted for. Rather, the “anti‐flypaper effect” is found. Important policy implications are drawn for C hina's fiscal decentralization reform.