Financing Local Public Projects∗

44 Pages Posted: 5 Aug 2022

See all articles by Levon Barseghyan

Levon Barseghyan

Cornell University

Stephen Coate

Cornell University - Department of Economics; National Bureau of Economic Research (NBER)

Abstract

This paper studies the financing of local public projects. The setting is a community with durable housing, undeveloped land available for new homes, and population turnover. The community invests in a public project that may be financed with a mix of a tax on current residents and a debt issue. The main result is that financing with a debt-tax mix is equivalent to pure tax finance coupled with a tax on future development whose proceeds are shared by future residents. This result has three implications. First, Ricardian Equivalence holds if and only if there would be no future development were the project purely tax financed. Second, when Ricardian Equivalence does not hold, the optimal debt level is such that the associated tax on development appropriately internalizes the negative externalities from this development. Third, when Ricardian Equivalence does not hold, the debt level preferred by current residents will be higher than optimal.

Keywords: Ricardian Equivalence, Local Public Finance, Development

Suggested Citation

Barseghyan, Levon and Coate, Stephen, Financing Local Public Projects∗. Available at SSRN: https://ssrn.com/abstract=4182939

Levon Barseghyan (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Stephen Coate

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-1912 (Phone)
607-205-2818 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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