When Capital Falls to Pieces: Public Investment and the Role of Private Capital Stock

Rebecca Maria Mari
24/12/2022

This paper considers the role played by capital stock endowments at local level in the private sector’s responsiveness to public investment. Using innovative municipality-level data, empirical evidence is obtained within the context of Northern Italy through a spatial regression discontinuity approach, exploiting the 2012 earthquake as an exogenous shock to private capital stock. The results suggest that, following the shock, areas with lower levels of private capital are more responsive to state-funded investment incentives targeted at production, than direct public investments in transport infrastructure. Investment incentives for production show higher returns in areas with lower private capital stock, on the back of a larger increase in access to secured credit associated with the policy. Instead, direct public investments in infrastructure appear to have a higher return to private employment and investment in areas with higher private capital stock, where private activity can be stimulated through public investment complementary with private capital stock. Overall, these results provide insights applicable to both post-disaster emergency response programmes and public development policies. In order to stimulate private capital and broader economic development, interventions should first aim to develop a sufficiently strong private capital basis and, later, leverage on its complementarity with public infrastructures, in order to further foster economic development.

Does the Depth of Trade Agreements Matter for Trade in Services?

Amélie Guillin, Isabelle Rabaud, Chahir Zaki
23/12/2022

In recent years, deep trade agreements spread around the world and go beyond tariff reductions. We aim to test whether the depth of agreements foster trade in services. To do so, we use a structural gravity type model and build new indicators of the depth of agreements based on the number of articles that are legally enforceable and that are related to trade in services. We show that, while only the deepest trade agreement raise trade in services, the quality of institution determines how deep agreements a ect both the intensive (measured by the quantity of trade) and extensive margins of trade (measured by the number of service sectors exports and the share of the highest service exported by a country). This result is more pronounced for some service provisions and is robust after we control for the endogeneity of deep trade agreements. Finally, our results also hold for MENA countries that we examine as an example of an emerging region that has a comparative advantage in services but whose most of the trade agreements are rather shallow.

Capital Development under Collateral Constraints. Do Investment Subsidies Work

Rebecca Maria Mari
30/11/2022

This paper studies the impact of productive investment subsidies on firms’ production decisions under credit market frictions. Through the practice of secured borrowing, collateral constraints present a friction in external credit markets, which substantially affects access to credit by smaller firms located in economically depressed areas. Productive investment subsidies are able to smooth out these frictions and stimulate marginal investment by firms which would have otherwise remained unfunded, thus supporting private capital development. Empirical evidence is obtained from a productive investment subsidies programme, to support recovery following two major earthquakes in Italy. The identification design facilitates recognition of the impact of subsidies across a random sample of firms, including firms that are generally not targets of traditional subsidy programmes for development. Furthermore, the absence of conditionality clauses for employment allows an unbiased estimate of the impact on labour input decisions. The results suggest the effectiveness of investment subsidies in supporting capital development and employment generation in the case of SMEs, with firm location playing a significant role in determining the relative impact strength.

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