Does fiscal redistribution discourage local public investment?

Thornton Matheson

The Economics of Transition, 2005, vol. 13, issue 1, 139-162

Abstract: This paper studies the determinants of regional (oblast‐level) public investment in transitional Russia, focusing on the effects of federal fiscal redistribution. A model of local government expenditure in the presence of regional asymmetries shows that revenue redistribution from wealthy to poor regions discourages local public investment. Random‐ and fixed‐effects estimation of regional panel data for 1994–97 supports the existence of a disincentive effect from fiscal redistribution on regional public investment, which varies according to a region's federal status and wealth: non‐republics have a lower propensity to invest out of transfers than out of own income, as do regions with above‐median per capita income. Republics reduce public investment more than current spending in response to higher federal taxation. Russia's ‘asymmetrical federalism’ thus creates different fiscal incentives for different types of regions.

Date: 2005
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