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/ournal of conomcc Persfieaives-
9
4
Fall 1995
Pngrs 217 226
Anomalies The Flypaper Effect
James R Hines Jr; Richard H Thaler
Economics can be distinguished from other social sciences by the belief that most (all?) behavior can be explained by assuming that rational agents with stable, well-defined preferences interact in markets that (eventually) clear. An empirical result qualifies as an anomaly if it is difficult to "rationalize" or if implausible assumptions are necessary to explain it within the paradigm. Suggestions for future topics should be sent to Richard Thaler, c/o Journal of Economic Perspectives, Graduate School of Business, University of Chicago, Chicago, IL 60637, or [email protected].
Introduction The 104th Congress is considering shifting federal revenues to the states. This
is not the first Gongress to contemplate such a step. In 1835, Congress; undertook the country's first expetimentwith revenue sharing, albeit under circumstances that are now rather hard to imagine. The U.S. federal government faced a quaint crisis in which its budget was in surplus (due to receipts from land sales and tariffs), the federal debt was fully paid off, and it was unclear whether the federal government could find additional worthwhile expenditures. To make matters worse, federal surpluses were projected to continue indefinitely. After considerable wrangling, it James R Hirtu, Jr., is Assodatc Professor of Public Policy, John F. Kennedy School of Gmxrnment, Haroard University, andFacully ResearthFellom, National Bureau oJEcmtomic ResearrJi, both in Cambridge' Massachtuetts Richard H. Thaler is Professor oJEcmwmiGs arid Behavioral Sdencx Graduate school oJBusiness, U>siversity oJChicago, Chicago, Ninois; and Restardt Auoeiat5 National Butzau oJEcnnomic Research, Camb idga' Mauarhusetts
was decided that the federal government would dispose of the surplus by distributing it to state governments on the basis of population. The politicians of the day took this step with the expectation that state governments would use the distribution to finance additional public works. In his speech to the Senate on Christmas Eve (!), Henry Clay (1843, p. 292) predicted that "With this ample resource, every desirable object of improvement, in every part of our extensive country, may, in due time, be accomplished."'
This expectation, that state governments will use the grants they receive from the federal government to increase local spending, is inconsistent with simple economic theory. To see why,...