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Propensity to Invest and the Additionality of Capital Transfers: A Country Panel Perspective

This paper takes stock of the last 80 years of theoretical and policy literature on the issue of capital grants. In addition, we provide empirical evidence on changes in the relative importance of capital grants, and their impact on fiscal outcomes for a large number of countries. In particular, our empirical analysis explores two claims often used to justify capital grants in practice: 1) Due to political economy reasons, local governments tend to underinvest relative to the level desired by the national government. We test this claim by comparing the propensity to invest of subnational vis-à-vis national governments. 2) The administrative and efficiency costs of earmarking grants for capital use are justified by their effect of inducing additional investments by subnational governments. We test this claim by comparing the propensity to invest of local governments out of capital grants compared to their propensity to invest out of general purpose (non-earmarked) grants and own resources.

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File URL: http://icepp.gsu.edu/files/2015/03/ispwp1216.pdf
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Paper provided by International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University in its series International Center for Public Policy Working Paper Series, at AYSPS, GSU with number paper1216.

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Length: 44 pages
Date of creation: 23 Mar 2012
Date of revision:
Handle: RePEc:ays:ispwps:paper1216
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Web page: http://aysps.gsu.edu/isp/index.html

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  1. Douglas Holtz-Eakin & Amy Ellen Schwartz, 1994. "Infrastructure in a Structural Model of Economic Growth," NBER Working Papers 4824, National Bureau of Economic Research, Inc.
  2. Nicoletta Feruglio & Jorge Martinez-Vazquez & Andrey Timofeev, 2008. "An Assessment of Fiscal Decentralization in Macedonia," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0814, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  3. Pedro Cantos & Mercedes Gumbau‐Albert & Joaqu�N Maudos, 2003. "Transport infrastructures, spillover effects and regional growth: evidence of the Spanish case," Transport Reviews, Taylor & Francis Journals, vol. 25(1), pages 25-50, December.
  4. David Albouy, 2010. "Evaluating the Efficiency and Equity of Federal Fiscal Equalization," NBER Working Papers 16144, National Bureau of Economic Research, Inc.
  5. Rioja, Felix K., 2003. "Filling potholes: macroeconomic effects of maintenance versus new investments in public infrastructure," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2281-2304, September.
  6. Pereira, Alfredo Marvao & Roca-Sagales, Oriol, 2003. "Spillover effects of public capital formation: evidence from the Spanish regions," Journal of Urban Economics, Elsevier, vol. 53(2), pages 238-256, March.
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