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

Andrew Young School of Policy Studies Research Paper Series No. 12-24

International Center for Public Policy Working Paper No. 12-16

49 Pages Posted: 7 Dec 2012

See all articles by Jorge Martinez-Vazquez

Jorge Martinez-Vazquez

Georgia State University - Andrew Young School of Policy Studies

Andrey Timofeev

Georgia State University - International Center for Public Policy

Date Written: March 1, 2012

Abstract

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.

Keywords: capital grants, public capital, fiscal federalism

JEL Classification: H54, H72, H77

Suggested Citation

Martinez-Vazquez, Jorge and Timofeev, Andrey, Propensity to Invest and the Additionality of Capital Transfers: A Country Panel Perspective (March 1, 2012). Andrew Young School of Policy Studies Research Paper Series No. 12-24, International Center for Public Policy Working Paper No. 12-16, Available at SSRN: https://ssrn.com/abstract=2186131 or http://dx.doi.org/10.2139/ssrn.2186131

Jorge Martinez-Vazquez (Contact Author)

Georgia State University - Andrew Young School of Policy Studies ( email )

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Andrey Timofeev

Georgia State University - International Center for Public Policy ( email )

Andrew Young School of Policy Studies
P.O. Box 3992
Atlanta, GA 30302-3992
United States
+1 404 413-0230 (Phone)
+1 404 413-0244 (Fax)

HOME PAGE: http://isp-aysps.gsu.edu/people/timofeev.html

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