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Capital grants and regional public investment in Spain: fungibility of aid or crowding-in effect?

  • Santiago Lago-Penas

The aim of capital grants to subcentral governments is to increase their investment. However, recipients may try to allocate additional resources to cut saving or deficit, generating a crowding-out effect on self-financed investment. Using data from the Spanish Autonomous Communities during the period 1984 to 1999, the effect of capital transfers on regional public investment, saving and deficit are estimated. Econometric results demonstrate that capital grants have no relevance when explaining the dynamics of saving. However, in deficit regressions they are shown to be both significant and negative. Both results lead us to a partial long-run crowding-out effect of grants on self-financed investment.

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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 38 (2006)
Issue (Month): 15 ()
Pages: 1737-1747

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Handle: RePEc:taf:applec:v:38:y:2006:i:15:p:1737-1747
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  1. Howard Chernick, 1998. "Fiscal Effects of Block Grants for the Needy: An Interpretation of the Evidence," International Tax and Public Finance, Springer, vol. 5(2), pages 205-233, May.
  2. Teresa Garcia-Milà & Therese McGuire, 2001. "Do Interregional Transfers Improve the Economic Performance of Poor Regions? The Case of Spain," International Tax and Public Finance, Springer, vol. 8(3), pages 281-296, May.
  3. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  4. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  5. Brian Knight, 2002. "Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program," American Economic Review, American Economic Association, vol. 92(1), pages 71-92, March.
  6. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  7. Gang, Ira N. & Ali Khan, Haider, 1990. "Foreign aid, taxes, and public investment," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 355-369, November.
  8. Pack, Howard & Pack, Janet Rothenberg, 1990. "Is Foreign Aid Fungible? The Case of Indonesia," Economic Journal, Royal Economic Society, vol. 100(399), pages 188-94, March.
  9. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
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