Firm Size and Public Investment Multipliers: Micro Evidence from Peru

James Sampi, Guillermo Javier Vuletin and J.T. Araujo

No 10997, Policy Research Working Paper Series from The World Bank

Abstract: This paper examines how the concentration of large firms influences the fiscal multiplier effects of public investment in transport infrastructure. Using data from 1,891 Peruvian municipalities and firm-level information, the analysis exploits a quasi-experimental setting stemming from an exogenous change in the Municipality Compensation Fund in 2010, Peru's primary fiscal transfer mechanism from the central government to subnational authorities. The findings show that public investment generates a positive fiscal multiplier four years after implementation, with a temporary adjustment occurring two years earlier. The multiplier is significantly higher in municipalities with a greater concentration of large firms, highlighting the role of firm concentration in amplifying fiscal shocks. These results suggest that fiscal resources may be more effectively targeted to municipalities with a higher concentration of large firms, where the impact of public investment is stronger, and that policies promoting firm growth can enhance the effectiveness of fiscal policy by increasing the multiplier.

Date: 2024-12-11
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