Fiscal Consolidation and Expenditure Arrears: Evidence from Local Governments’ Investments

Paolo Chiades, Luciano Greco, Vanni Menegotto, Luigi Moretti and Paola Valbonesi (paola.valbonesi@unipd.it)
Additional contact information
Paolo Chiades: Bank of Italy
Vanni Menegotto: Bank of Italy
Paola Valbonesi: University of Padova

No 197, "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno"

Abstract: In this paper we investigate how tightening fiscal constraints (e.g., through intergovernmental transfer cuts) can lead local governments to postpone investments’ payments. We first provide a simple model showing how local governments can use arrears to relax their short-run financial constraints. We then empirically assess our theoretical prediction, using information from accounting and financial reports of all Italian municipalities for the period 2003-2010. Exploiting the long-lasting effect of 1979 structural reform of Italian local public finance, we employ an instrumental variable approach to face endogeneity concerns. We find robust evidence that tighter fiscal and financial conditions of the local governments determine larger arrears for public investment expenditures.

Keywords: Intergovernmental Grants; Payment in Government to Business (G2B) Transactions; Instrumental Variables; Panel Data. (search for similar items in EconPapers)
JEL-codes: C33 C36 H30 H72 H77 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2015-04
New Economics Papers: this item is included in nep-pbe
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:pad:wpaper:0197

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