Flypaper effect of fiscal transfers on sub-national governments’ expenditure: Empirical evidence from Ghana

Abstract

Studies on the flypaper effect which describes the behavior of the lower level governments on their use of fiscal transfers and own-source revenues have received little scholarly attention, particularly in Ghana. This study estimates the two-step system GMM of 19 newly created district assemblies from 2018 to 2022 in Ghana. The findings indicate the presence of a flypaper effect in the new districts as the coefficient estimates of the fiscal transfers exceed the coefficient estimate of the internally generated revenue per capita. The study concludes that while the fiscal transfer system in Ghana has successfully directed financial resources to the lower level governments, it appears though as counterproductive to own-source revenue generation at the sub-national government levels. The study recommends that the central government redesign the fiscal transfer scheme to reduce the over reliance on the transfers by the lower level governments. The study suggests that the government uses the matching grant scheme in the allocation of financial resources to the district.

Keywords: fiscal transfers, flypaper effect, panel regression, Ghana.

JEL Code: E62, P35, H70, H76, H77

DOI: 10.7176/JESD/16-3-03

Publication date: May 30th 2025