EMANES Working Paper No 64
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.