Capital Grants and Regional Public Investment in Spain: Fungibility of Aid or Crowding-in Effect?
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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