Flypaper Effect in the Republic of Serbia

Abstract

The main objective of this study is to examine whether the local self-governments (LSG) in Serbia spend their budget as predicted by the flypaper effect (FPE). The presence of the FPE was estimated using the panel regression applied to the population of 166 Serbian LSGs for the period 2011-2019. Similar to findings in other country-specific empirical studies, the results of regression analysis robustly confirmed the presence of the FPE. The occurrence of the FPE is dependent on the level of LSGs’ development and changes in fiscal policy associated with the recent fiscal consolidation. The results obtained indicate that the allocation policy of unconditional transfers in Serbia is rule-based and allegedly free from political factors. The hypothesis that was examined tried to find out whether the overall presence of the FPE is driven by the fiscal illusion deriving from the institutional context of the Serbian LSG public finance despite transparent system of transfers allocation. To the best our knowledge, this is the first empirical study that examined the FPE in Serbia.