More documents from Vuchelen, Jef; Caekelberg, Stijn
More documents from Applied Economics

Export to your Reference Manger

Please Copy & Paste



Bookmark and Share

Explaining public investment in Western Europe

[journal article]

Vuchelen, Jef; Caekelberg, Stijn

fulltextDownloadDownload full text

(563 KByte)

Citation Suggestion

Please use the following Persistent Identifier (PID) to cite this document:

Further Details
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.
Classification Public Finance
Free Keywords public investment; behavioral economics; budgetary consolidations
Document language English
Publication Year 2010
Page/Pages p. 1783-1796
Journal Applied Economics, 42 (2010) 14
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)