Public capital investment spike events: the regional dimension in Greece

Deviating from the standard practice of linking public infrastructure and regional output expansion through a linear long-run equilibrium relationship, we consider the case where public investments follow a ‘bumpy’ path instead. According to the political business cycles theory, we argue that public infrastructure investments occur in a lumpy manner at the beginning of the electoral period, with reduced activity between spikes. In this framework, we propose a novel methodology applied in a different context to identify the role of investment spikes on the performance of Greek regions from 1995 to 2015. To the best of our knowledge, this is the first research focusing on the relationship between spikes in public investments and their impact on regional development. To address the research question, we utilize a difference-in-differences (Diff in Diff) model. However, it is important to note that this approach is susceptible to endogeneity concerns, particularly it might suffer from omitted variable bias, a form of endogeneity. The analysis shows a strong increase in regional labor productivity, peaking three years after the shock.