Declining Free Lunch: State Capacity and Foregone Public Spending

Sarah Fritz, Catherine van der List and Lorenzo Incoronato

No 2567, RFBerlin Discussion Paper Series from ROCKWOOL Foundation Berlin (RFBerlin)

Abstract: This paper documents substantial fiscal waste in the context of one the world's largest regional development programs - the EU Cohesion Policy. We study Italy, and find that 20% of funding commitments are never paid out and funneled into unfinished or never-started projects. In our setting, this happens for reasons unrelated to fiscal constraints - municipalities appear to simply leave money on the table. Foregone spending is more prevalent in Southern regions, but there is also stark variation across municipalities within regions. We show that such under-utilization of available funds is strongly associated with limited administrative capacity of local governments.

Keywords: foregone spending; state capacity; fiscal waste (search for similar items in EconPapers)
JEL-codes: H11 H83 R58 (search for similar items in EconPapers)
Date: 2025-09
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