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The Impact of Debt Financing on the Level of Capital Spending

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  • Myungsoon Hur

Abstract

This paper examines whether the debt illusion hypothesis holds at the local level. Generally, municipal bonds are issued to finance capital spending. However, capital costs could be funded by current revenues or borrowing. If taxpayers perceive debt financing to be less costly than current taxation, reliance on debt tends to incur larger public spending. By utilizing a sample of New Jersey municipalities in the U.S., this study found that municipalities relying on more debt spent more on capital investments than those relying on less debt.

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  • Myungsoon Hur, 2001. "The Impact of Debt Financing on the Level of Capital Spending," International Review of Public Administration, Taylor & Francis Journals, vol. 6(2), pages 91-101, December.
    • Handle: RePEc:taf:rrpaxx:v:6:y:2001:i:2:p:91-101
    DOI: 10.1080/12294659.2001.10804983
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