The Constrained Politics of Local Public Investment Under Cooperative Federalism

My article “Fiscal policy preferences, trade-offs, and support for social investment” co-authored with Donato di Carlo and Leon Wansleben was just published by the Socio-Economic Review. The article is open access and available here.

The research for this article was previously featured in a report by the German magazine WirtschaftsWoche. The article is available here.

On 13 June 2022, I will also present our main findings from this research project in Cologne’s city hall. All information about this talk is available online here.

Abstract:

Public investment spending declined steadily in advanced economies during the last three decades. Germany is a case in point where the aggregate decline coincided with growing inequality in investments across districts. What explains the variation in local investment spending? We assembled a novel data set to investigate the effects of structural constraints and partisanship on German districts’ investment spending from 1995 to 2018. We find that the lack of fiscal and administrative capacity significantly influences local investment patterns. Yet, within these constraints, partisanship matters. Conservative politicians tend to prioritize public investment more than the left. This is especially the case when revenues from local taxes are low. As the fiscal conditions improve, left-wing politicians increase investment more strongly and hence the difference between the left and the right disappears. Our findings are indicative of how regional economic divergence can emerge even within cooperative federal systems and show that, even when decision-makers operate under various institutional and structural constraints, partisanship matters for how these actors allocate discretionary spending.