The constrained politics of local public investments under cooperative federalism

Björn Bremer, Donato Di Carlo and Leon Wansleben

No 21/4, MPIfG Discussion Paper from Max Planck Institute for the Study of Societies

Abstract: Public investment spending declined steadily in advanced economies during the last three decades. Germany is a case in point where the aggregate decline coincided with growing inequality in investments across districts. What explains variation in local investment spending? We assembled a novel dataset to investigate the effects of structural constraints and partisanship on German districts' investment spending from 1995 to 2018. We find that the lack of fiscal and administrative capacity significantly influences local investment patterns. Yet, within these constraints, partisanship matters. Conservative politicians tend to prioritize public investment more than the left. This is especially the case when revenues from local taxes are low. As the fiscal conditions improve, left-wing politicians increase investment more strongly and hence the difference between the left and the right disappears. Our findings are indicative of how regional economic divergence can emerge even within cooperative federalist systems and show that, despite rigid fiscal rules, partisanship matters when parties face trade-offs over discretionary spending.

Keywords: constrained partisanship; fiscal federalism; Germany; local politics; public investment; Deutschland; Fiskalföderalismus; Lokalpolitik; öffentliche Investitionen; politische Parteien (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cdm, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:mpifgd:214

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