Does Fiscal Decentralisation Foster Regional Investment in Productive Infrastructure?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The aim of this paper is to analyze the effect of revenue decentralization on the provision of infrastructure at the sub-national level. We estimate the effects of revenue decentralization and earmarked grant financing on the level of sub-national infrastructure investment in 20 European countries over the period 1990-2009. The results are interpreted in light of the predictions of the theory on fiscal federalism. We find that it is sub-national infrastructure investment that increases after revenue decentralization and not investment in redistribution. However, the effect of revenue decentralization is lower the higher the use of earmarked grants to fund infrastructure investment. Terms of use: Documents in

Fiscal externalities in a three-tier structure of government

“…Indeed, some recent empirical evidence suggests that centralization may negatively affect productive regional investment (e.g. Gonzalez alegre, 2010; Kappeler et al, 2013). However, such papers do usually not explicitly account for redistribution or the federal structure.…”

“…I 1 represents productive investment by region 1, for instance in infrastructure. The assumption that only regional governments invest in the model reflects that the bulk of public investment across EU countries is undertaken at the regional level, more than 60 percent in EU-15 countries, according to Kappeler et al (2013). The representative individual in region 1 exclusively receives utility from private consumption C 1 .…”

Creating Conditions for Effective Public Investment

“…In some cases large investments such as airports and ports are the responsibilities of sub-national governments, and increasingly technology is facilitating the transfer of responsibilities for utilities to sub-national entities. (Kappeler et al, 2012) In the United States, most transportation infrastructure is owned and operated by sub-national governments, while the private sector owns most freight rail infrastructure, dams, the energy grid, telecommunications systems, and half of drinking water systems (Posner, n.d.).…”

“…Own revenues are important for public investment not only to ensure the availability of resources but also because tapping own revenue is critical for certain types of investment. Kappeler et al (2012) find that "revenue decentralization, measured as the budget share of locally-generated tax revenues", encourages regional governments to spend more on growth-enhancing (economic) infrastructure as compared to redistributive (social) infrastructure -an incentive seemingly weakened by capital grants. Own revenue is also frequently critical for meeting co-financing requirements to access intergovernmental grants.…”