Scandinavian Working Papers in Economics

Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

No 273: Does fiscal decentralization foster regional investment in productive infrastructure?

Andreas Kappeler (), Albert Solé-Ollé (), Andreas Stephan () and Timo Välilä ()
Additional contact information
Andreas Kappeler: European Investment Bank, Postal: Economics Department, , European Investment Bank, , 100, boulevard Konrad Adenauer, , L-2950 Luxembourg
Albert Solé-Ollé: University of Barcelona
Andreas Stephan: Jönköping International Business School
Timo Välilä: European Investment Bank, Postal: Economics Department, , European Investment Bank, , 100, boulevard Konrad Adenauer, , L-2950 Luxembourg

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

31 pages, April 12, 2012

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