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Explaining public investment in Western Europe


Vuchelen, Jef; Caekelberg, Stijn


Bitte beziehen Sie sich beim Zitieren dieses Dokumentes immer auf folgenden Persistent Identifier (PID):http://nbn-resolving.de/urn:nbn:de:0168-ssoar-253983

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Abstract Budgetary consolidations are considered the obvious explanation for the decline in public investment that most Western European countries experienced over the past three decades. However, regressions based on budgetary variables tend to overpredict public investment during the post 1990-period, i.e., when the budgetary stress eased. We supplement the budgetary consolidation approach to public investment with ideas from behavioural economics to explain why these investments do not increase when additional budgetary resources are available. We use the peak/end evaluation procedure to capture the frustration of voters as cuts in government consumption expenditures accumulate. This ‘memory-effect’ of budgetary consolidations implies that voters recall the previous peak government consumption expenditures. They remain discontent as long as current expenditures are below the peak value. When the budgetary situation improves, policy makers will choose to increase government consumption because this is electorally more rewarding. Public investment will thus decline when budgetary consolidations are imposed and will remain constant when additional budgetary resources emerge. We test for a memory-effect by introducing expenditure gaps in public investment regressions. These gaps equal the difference between the highest previously observed primary government consumption to GDP ratio and the current ratio. The regression results for most EU-countries support our assumption.
Klassifikation Öffentliche Finanzen und Finanzwissenschaft
Freie Schlagwörter public investment; behavioral economics; budgetary consolidations
Sprache Dokument Englisch
Publikationsjahr 2010
Seitenangabe S. 1783-1796
Zeitschriftentitel Applied Economics, 42 (2010) 14
DOI http://dx.doi.org/10.1080/00036840701736180
Status Postprint; begutachtet (peer reviewed)
Lizenz PEER Licence Agreement (applicable only to documents from PEER project)