Spatial Approach for Estimating the Size of Flypaper Effect: Case in Decentralizing Indonesia

Abstraksi

After almost five decades of study on the effect of intergovernmental grants, the flypaper effect is not avoidable when a lump-sum transfer is granted to local bureaucrats. The grant from government stays in the government while citizens’ income remains with the citizens. This paper explores the flypaper effect in Indonesia using the spatial approach. The spatial approach is offered in this paper due to the fact that ignoring the issues of spillover of public expenditure, the mobility of the median voters, and inter-regional relationships would create bias when estimating size of flypaper effect. In short, spatial dependency matters for estimating the flypaper effect. This study employs various techniques and experiments controlling the spatial effect on measuring the size of the flypaper effect using Indonesian data, which has a value of 1.7. This paper presents the nature effect of grant by its type. It shows evidence on intergovernmental grants theory (See: Bradford & Oates, 1971; Courant, Gramlich, & Rubinfeld, 1978; and Romer & Rosenthal, 1980) where the impact of a lump-sum grant and matching grant are different, whether on aggregate spending, overhead spending or capital spending. This paper also offers an analysis of the dynamics of the flypaper effect due to the decentralization process, particularly in the case of Indonesia, where the size of the flypaper effect became smaller. Finally, spatial distribution of the flypaper effect in Indonesia is presented that emphasizes spatial matter for creating an asymmetric flypaper effect.