We investigate the effect of general-purpose transfers on different expenditure categories and tax rates in the municipalities of Saxony (eastern Germany) and North Rhine-Westphalia (western Germany). Findings from the panel data analysis suggest the existence of the "flypaper effect" -...

The implicit idea underlying theories of fiscal federalism is that fiscal decentralization can change the composition of government expenditure. That is, regardless of whether decentralization enables governments to more readily reflect citizen preferences regarding spending categories or...