Intergovernmental Grants and Elderly Care

Abstract: The flypaper effect is an empirical puzzle that arises in studies on intergovernmental grants. While economic theory predicts that intergovernmental grants are crowding out local government spending, empirical studies often show a high degree of crowding in. This thesis uses the stimulus grants for elderly care, given by the Swedish government to the municipalities in 2006 to 2010, as a case study of the flypaper effect. To test if there is a flypaper effect in this case I run a fixed effects regression, correcting for autocorrelation, to see if the trend in elderly care spending changes when the stimulus grants are introduced. The result of this study indicates that the stimulus grants for elderly care are crowding in local government spending. It seems like municipalities not only increase spending with the whole amount of grants, they also put in the same amount and more by themselves. When adding a variable with lagged stimulus grants, this gives an even stronger effect, indicating that more resources are used in elderly care the year after the stimulus grants were given. One reason for this might be that many projects paid by the stimulus grants became parts of the regular operation when they were finalized.