Unconditional federal transfers and state government spending: The flypaper effect in Nigeria and South Africa

Abdurrahman Isik (1) Peter D. Golit (2) Paul Terhemba Iorember (3)
(1) Epoka University, Albania
(2) Central Bank of Nigeria, Nigeria
(3) Nile University of Nigeria, Nigeria


The flypaper effect is undoubtedly among the most interesting concepts in subnational government spending behavior. This study is the first attempt to provide empirical evidence on the existence of the flypaper effect in the two largest economies in Sub-Saharan Africa: Nigeria and South Africa. Using the two-step system generalized method of moment’s estimator, our results show that the flypaper effect exists for both state and provincial governments in Nigeria and South Africa. Provincial governments in South Africa are found to be more responsive to positive changes in unconditional federal transfers than state governments in Nigeria. We therefore recommend sen­sitization on the receipt and disbursement of unconditional federal transfers. This will help reduce the illusion or information asymmetry about the use of unconditional federal transfers.

Full text article

Generated from XML file


Allers, M. A., Vermeulen, W. (2016). Capitalization of equalizing grants and the flypaper effect. Regional Science and Urban Economics, 58, 115-129. https://doi.org/10.1016/j.regsciurbeco.2016.03.005

Alymkulova, N., Iorember, P. T., & Omotesho, O. (2023). Public Spending and Private Sector Investment in Nigeria: An Investigation of the Crowding-in (or Crowding-out) Effect Amidst Deteriorating Fiscal Balance. In Post-Independence Development in Africa: Decolonisation and Transformation Prospects (pp. 263-278). Cham: Springer International Publishing. https://doi.org/10.1007/978-3-031-30541-2_15

Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277-297. https://doi.org/10.2307/2297968

Baskaran, T. (2016). Intergovernmental transfers, local fiscal policy, and the flypaper effect: evidence from a German state. Finanzarchiv/Public Finance Analysis, 1-40. https://doi.org/10.1628/001522116X14462054864882

Bature, N. B., Ogba, J. L., & Iormom, I. B. (2022). Explaining the incidence of household healthcare expenditure in Nigeria under a regime of low fiscal provision: Is the exchange rate important? Journal of Public Affairs, 22(1), e2365. https://doi.org/10.1002/pa.2365

Becker, E. (1996). The illusion of fiscal illusion: Unsticking the flypaper effect. Public Choice, 86(1), 85-102. https://doi.org/10.1007/BF00114876

Bradford, D. F. and Oates, W. E. (1971). Towards a predictive theory of intergovernmental grants. American Economic Review, 61(2): 440-44

Brollo, F., Nannicini, T. Perotti, R., and Tabellini, G. (2013). The political resource curse. American Economic Review 103, 1759-1796. https://doi.org/10.1257/aer.103.5.1759

Cruz, T. and Silva, T. (2020). Minimum spending in education and the flypaper effect. Economics of Education Review 77, 102012. https://doi.org/10.1016/j.econedurev.2020.102012

Darby, J., Muscatelli, A., Roy, G. (2005). Fiscal Consolidation and decentralization: a tale of two tiers. Fiscal Studies 26 (2), 169-195. https://doi.org/10.1111/j.1475-5890.2005.00009.x

De Mello, L. (2000). Fiscal decentralization and intergovernmental fiscal relations: a cross-country analysis. World Development 28 (2), 365-380. https://doi.org/10.1016/S0305-750X(99)00123-0

Dollery, B. E., and Worthington, A. C. (1996). The empirical analysis of fiscal illusion. Journal of Economic Surveys 10, 261-297. https://doi.org/10.1111/j.1467-6419.1996.tb00014.x

Gbaka, S., Iorember, P. T., Abachi, P. T., & Obute, C. O. (2021). Simulating the macroeconomic impact of expansion in total government expenditure on the economy of Nigeria. International Social Science Journal, 71(241-242), 283-300. https://doi.org/10.1111/issj.12289

Gramlich, E.M., Galper, H. (1973). State and local fiscal behavior and federal grant policy. Brookings Papers on Economic Activity, 1, 15-58. https://doi.org/10.2307/2534084

Hines, J. R., and Thaler, R. H. (1995). Anomalies: The flypaper effect. Journal of Economic Perspectives 9, 217-226. https://doi.org/10.1257/jep.9.4.217

Hobdari, N., Nguyen, V., Dell'Erba, S. and Ruggiero, E. (2018). Lessons for effective fiscal decentralization in Sub-Saharan Africa. Departmental Paper Series, African Department, International Monetary Fund (IMF), No. 18/10, ISBN 9781484358269 (paper). https://doi.org/10.5089/9781484358269.087

IMF (2009). Macro policy lessons for a sound design of fiscal decentralization. IMF, Washington D. C.

Inman, R. P. (2008). The flypaper effect. Working Paper 14579. National Bureau of Economic Research. https://doi.org/10.3386/w14579

Iorember, P. T., & Jelilov, G. (2018). Computable general equilibrium analysis of increase in government agricultural expenditure on household welfare in Nigeria. African Development Review, 30(4), 362-371. https://doi.org/10.1111/1467-8268.12344

Iorember, P. T., Gbaka, S., Jelilov, G., Alymkulova, N., & Usman, O. (2022c). Impact of international trade, energy consumption and income on environmental degradation in Africa's OPEC member countries. African Development Review, 34(2), 175-187. https://doi.org/10.1111/1467-8268.12629

Iorember, P. T., Iormom, B., Jato, T. P., & Abbas, J. (2022b). Understanding the bearable link between ecology and health outcomes: the criticality of human capital development and energy use. Heliyon, 8(12). https://doi.org/10.1016/j.heliyon.2022.e12611

Iorember, P. T., Jelilov, G., Alymkulova, N., & Yua, P. M. (2022a). Reconsidering the nexus between monetary policy and economic growth in Nigeria: The role of interest rate, money supply, and financial inclusion. International Social Science Journal, 2(244), 339-351. https://doi.org/10.1111/issj.12324

Knight, B. (2002). Endogenous Federal Grants and crowd-out of state government spending: Theory and evidence from the federal highway aid program. American Economic Review 92, 71-92. https://doi.org/10.1257/000282802760015612

Martinez-Vazquez, J. and Sepulveda, C. (2018). A theoretical rationale for the fiscal gap model of equalization transfers. international center for public policy. Working Paper 18-23, November. https://doi.org/10.2139/ssrn.3460234

Musa, M. S., Jelilov, G., Iorember, P. T., & Usman, O. (2021). Effects of tourism, financial development, and renewable energy on environmental performance in EU-28: does institutional quality matter? Environmental Science and Pollution Research, 28(38), 53328-53339. https://doi.org/10.1007/s11356-021-14450-z

Niskanen, W. (1968). The Peculiar Economics of Bureaucracy. The American Economic Review, 58(2): 293-305.

Oates, W., 2006. On theory and practice of fiscal decentralization. IFIR Working Paper Series 2006-05. Institute for Federalism and Intergovernmental Relations, Lexington.

Ozili, P. K., & Iorember, P. T. (2023). Financial stability and sustainable development. International Journal of Finance & Economics, https://doi.org/10.1002/ijfe.2803

Singhal, M. (2008). Special interest groups and the allocation of public funds. Journal of Public Economics 92, 548-564. https://doi.org/10.1016/j.jpubeco.2007.05.005

Sour, L. (2013). The flypaper effect in Mexican local governments. Estudios Económicos, 165-186. https://www.jstor.org/stable/23609654

Tanjunga, A. H.; Salamb, S.; Rusdi, J. F.; Ermawati, Y.; Novianty, I.; Hendaris, R. B. and Apriliawati, Y. (2021). Flypaper Effect Assessment Methods in the Expansion of Regional Autonomy. MethodsX 8, 101387. https://doi.org/10.1016/j.mex.2021.101387

Turnbull, G. K. (1998). The overspending and flypaper effects of fiscal illusion: Theory and empirical evidence. Journal of Urban Economics, 44(1), 1-26. https://doi.org/10.1006/juec.1997.2056

Usman, O., Iorember, P. T., Jelilov, G., Isik, A., Ike, G. N., & Sarkodie, S. A. (2021). Towards mitigating ecological degradation in G-7 countries: accounting for economic effect dynamics, renewable energy consumption, and innovation. Heliyon, 7(12). https://doi.org/10.1016/j.heliyon.2021.e08592

Usman, O., Iorember, P. T., Ozturk, I., & Bekun, F. V. (2022). Examining the interaction effect of control of corruption and income level on environmental quality in Africa. Sustainability 14, 11391. https://doi.org/10.3390/su141811391

Zhou, L., Iormom, B. I., Azhar, M. S., & Peng, M. Y. P. (2022). Domestic inflation, exchange rate, and aggregate import demand nexus in Nigeria: New evidence from cointegrating regression. International Journal of Finance & Economics, 27(4), 4154-4165. https://doi.org/10.1002/ijfe.2364


Abdurrahman Isik
Peter D. Golit
Paul Terhemba Iorember
piorember1990@gmail.com (Primary Contact)
Author Biographies

Abdurrahman Isik, Epoka University

Department of Economics, Epoka University, Albania; aisik@epoka.edu.al

Peter D. Golit, Central Bank of Nigeria

Research Department, Central Bank of Nigeria, Nigeria; golitson2@yahoo.com

Paul Terhemba Iorember, Nile University of Nigeria

Department of Economics, Nile University of Nigeria, Nigeria; piorember1990@gmail.com

Isik, A., Golit, P. D., & Iorember, P. T. (2023). Unconditional federal transfers and state government spending: The flypaper effect in Nigeria and South Africa. Modern Finance, 1(1), 99–115. https://doi.org/10.61351/mf.v1i1.46

Article Details

Most read articles by the same author(s)

No Related Submission Found