Abstract
Abstract There is a broad theoretical consensus on the effects of transfers (desired incentive impacts and induced adverse effects). But, as the literature review shows, there is not an accepted methodology for the empirical evaluation of these effects. The authors suggest a simple but rigorous empirical approach to quantify the catalytic effect of conditioned transfers for investment and their asymmetric impact across regions in Spain. To identify this behaviour, they have applied different empirical approaches with frontier techniques that let them consider the frontier as a proxy for potential investment. The results show that the conditioned transfers received by the regions from higher levels of government have a stimulus effect for investments, especially in the poor regions. The authors identify several factors explaining this unbalanced catalytic effect: the political cost of tax collection, political factors, inadequate management of debt, and other variables such as the level of economic development, population density, and the economic cycle.
Highlights
Collaboration between levels of government to achieve certain economic policy objectives, such as territorial development or rebalancing, is one of the essential arguments justifying the existence of intergovernmental transfers
We calculate the divergence between actual and potential investment, identifying the frontier as the potential investment which could be achieved if the grants had a catalytic effect on it, since it is including both the obligatory investment of the regions, in the sense that many of their funding sources are conditional on the realization of capital expenditures, and the investments voluntarily made by each region, the outcome of the catalytic effect of the transfers on investment
The explanatory factors we have found for this asymmetry in the investment behaviour of the regions include political aspects, management or planning associated with the accumulated debt, the political cost of tax collection, and other factors such as the level of economic development, population and population density, and the economic cycle
Summary
Collaboration between levels of government to achieve certain economic policy objectives, such as territorial development or rebalancing, is one of the essential arguments justifying the existence of intergovernmental transfers. It is true that access to traditional sources of financing of capital expenditure for regional governments is usually restricted in periods of crisis, with public investment being possibly forced to play its traditional role of financial adjustment (Allain-Dupre et al, 2012).. It is true that access to traditional sources of financing of capital expenditure for regional governments is usually restricted in periods of crisis, with public investment being possibly forced to play its traditional role of financial adjustment (Allain-Dupre et al, 2012).1 Donor governments want their transfers to stimulate investment in the recipient economies, with the ultimate aim of achieving the intended growth and convergence objectives. This way, a small gap will mean that grants have a high catalytic effect on investment
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