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Fiscal Decentralization and Public Investment in Innovation: A Country Panel Analysis

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  • Daniel G Colombo
  • Jorge Martinez-Vazquez

Abstract

This article presents a first analysis of the potential link between the level of fiscal decentralization of a country and its public investment in innovation. We present a theoretical model where a “benevolent government” invests in research and development (R&D) aiming at maximizing net income, and R&D results are subject to interregional knowledge spillovers. The model predicts that decentralization leads to a lower level of public spending on innovation, and to a lower share of basic research in the government R&D budget. These hypotheses are empirically tested using country aggregate data. The results provide empirical support to the mentioned hypotheses, as we find evidence that higher levels of both expenditure and revenue decentralization are associated with a lower intensity of basic research in public R&D and with a lower level of R&D spending. The strength of the evidence, however, is weakened by the small sample size and shortcomings of the indicators used in the analysis.

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  • Daniel G Colombo & Jorge Martinez-Vazquez, 2020. "Fiscal Decentralization and Public Investment in Innovation: A Country Panel Analysis," Publius: The Journal of Federalism, CSF Associates Inc., vol. 50(4), pages 672-697.
    • Handle: RePEc:oup:publus:v:50:y:2020:i:4:p:672-697.
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    File URL: http://hdl.handle.net/10.1093/publius/pjz033
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    Cited by:

    1. Kassouri, Yacouba, 2022. "Fiscal decentralization and public budgets for energy RD&D: A race to the bottom?," Energy Policy, Elsevier, vol. 161(C).
    2. Pedro Jorge Holanda Figueiredo Alves & Jevuks Matheus Araujo & Ana Karolina Acris Melo, 2023. "Fiscal decentralization and economic growth: evidence from Brazilian states," Public Sector Economics, Institute of Public Finance, vol. 47(2), pages 255-280.

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