Determinants of municipal investments

Abstract

ABSTRACT This article studies local government investments using a panel data set of Norwegian municipalities in the period 2003–2019. We investigate variations in investments across local governments and their relation to fiscal capacity, needs based on population growth, and political factors. Our results suggest that expected population growth and fiscal capacity largely explain variations in investments. The finding that expected population growth is a strong determinant, while other factors such as political composition of the local council has little if any effect, indicates that Norwegian local governments are quite rational in deciding their investment policy. On the other hand, we do observe indications of election cycles, where investments increase in election years. We also find results suggesting that increased investments can increase the vote-share for the incumbent coalition, although we see no additional effect from increasing investments in election years. Hence, investments do not seem to be completely insulated from political considerations.