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" -...

We investigate how lump-sum equalization transfers affect expenditures and taxes in the municipalities of the largest German state North Rhine-Westphalia. In general, those general-purpose transfers cannot be treated as exogenous variables. Thus, for the identification of causal effects, two...