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M exican Municipalities and the Flypaper Effect
Author(s) -
CáRDENAS OSCAR J.,
SHARMA AMARENDRA
Publication year - 2011
Publication title -
public budgeting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.694
H-Index - 30
eISSN - 1540-5850
pISSN - 0275-1100
DOI - 10.1111/j.1540-5850.2011.00990.x
Subject(s) - estimator , panel data , economics , econometrics , demographic economics , difference in differences , public economics , microeconomics , statistics , mathematics
We investigate the phenomenon of flypaper effect and its relationship with the local tax effort by using a panel data comprising approximately 48 percent of the Mexican municipalities. Our estimations based on the fixed effect and difference GMM estimators confirm the existence of flypaper effect. Moreover, we find evidence to suggest that the richer municipalities are likely to experience substitution effect, i.e., the lower levels of tax effort. We also find that the magnitude of the flypaper effect is a decreasing function of the economic wellbeing of municipalities. This calls for an overhaul of the allocation mechanism of unconditional grants to the Mexican municipalities.