Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 199: Does fiscal decentralisation foster regional investment in productive infrastructure?

Andreas Kappeler (), Albert Solé-Ollé, Andreas Stephan and Timo Välilä
Additional contact information
Andreas Kappeler: Ratio, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
Albert Solé-Ollé: Ratio, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
Andreas Stephan: Ratio, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
Timo Välilä: Ratio, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden

Abstract: 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.

Keywords: Regional investment; fiscal federalism; dynamic panel data

JEL-codes: C23; H54; H76; H77

29 pages, November 13, 2012

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