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Fiscal Consolidation and Expenditure Arrears: Evidence from Local Governments’ Investments

Author

Listed:
  • Paolo Chiades

    (Bank of Italy)

  • Luciano Greco

    () (University of Padova)

  • Vanni Menegotto

    (Bank of Italy)

  • Luigi Moretti

    () (University of Padova)

  • Paola Valbonesi

    () (University of Padova)

Abstract

In this paper we investigate how tightening fiscal constraints (e.g., through intergovernmental transfer cuts) can lead local governments to postpone investments’ payments. We first provide a simple model showing how local governments can use arrears to relax their short-run financial constraints. We then empirically assess our theoretical prediction, using information from accounting and financial reports of all Italian municipalities for the period 2003-2010. Exploiting the long-lasting effect of 1979 structural reform of Italian local public finance, we employ an instrumental variable approach to face endogeneity concerns. We find robust evidence that tighter fiscal and financial conditions of the local governments determine larger arrears for public investment expenditures.

Suggested Citation

  • Paolo Chiades & Luciano Greco & Vanni Menegotto & Luigi Moretti & Paola Valbonesi, 2015. "Fiscal Consolidation and Expenditure Arrears: Evidence from Local Governments’ Investments," "Marco Fanno" Working Papers 0197, Dipartimento di Scienze Economiche "Marco Fanno".
  • Handle: RePEc:pad:wpaper:0197
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    References listed on IDEAS

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    More about this item

    Keywords

    Intergovernmental Grants; Payment in Government to Business (G2B) Transactions; Instrumental Variables; Panel Data.;

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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