This study estimates the flypaper effect of intergovernmental transfers in the Brazilian education sector. Education funds in Brazil are comprised by local revenue and intergovernmental transfers, both tied to education, and other non-tied local revenue and intergovernmental transfers. By using the previous year’s municipal enrollments relative to the state’s enrollment in basic education as an instrument for the amount of funds received from intergovernmental grants, represented by FUNDEB, we estimate the responses of the Brazilian municipal governments to three different types of revenues (locally collected versus state and federal transfers tied to education). We find that the elasticity of educational expenses for funds from state redistribution transfers is significantly greater than the elasticity of such government responses to funds collected locally, indicating a flypaper effect equal to 0.616. Interestingly, we do not find a flypaper effect for other intergovernmental transfers from the federal government that are done through individual agreements. We rely on the information hypothesis to explain our findings.
