Lump-Sum Intergovernmental Grants Have Price Effects: a Note

The aim of this note is to show that the fiscal illusion model of Wallace Oates unambiguously predicts a flypaper effect. The original contribution does not reach this result because equal increases in the lump-sum grant and the income of the median voter are compared. When the correct comparison is made, between a dollar increase in the lump-sum grant and an increase in the income of the median voter equal to his or her tax share, the Slutsky equation of the model implies that the flypaper effect is unambiguous.