Essays on the Unintended E?ects of Local Government Spending

With the introduction of the European Stability and Growth Pact most European members introduced domestic ?scal rules to make all di?erent levels of govern- ment responsible for the control of central public accounts. There is a broad debate on the suitability of the ?scal rules set in the Treaty of Maastricht and in the Stability and Growth Pact. The present PhD's thesis review the evolution of Domestic Stability Pact in Italy (Chapter 1) and empirically investigate two research questions. In Chapter 2 we explore the impact of capital expenditure constraints on investments in public works. After 2008, the Italian central gov- ernment strongly changed ?nancial rules aimed at imposing ?scal discipline on local governments. Municipalities subject to the Domestic Stability Pact (DSP) collided with new stronger expenditure restrictions and tougher punishments for non-compliers. This institutional change allows us to identify a causal relationship between the DSP and investment in public works implementing a †œDi?erence-in- Di?erences†� (D-i-D) design. Being exposed to the Pact reduces investment in public works by 47% and number of auctions by 44%, while increases winning re- bate by 5.5% and number of bidders by 16%. In Chapter 3 we evaluate the e?ect of a reduction in investment for public works on new ?rm formation. The results show that the amount invested in public works by local governments is a very important determinant of new ?rm formation. A one standard deviation decrease in total starting value decreases the entry rate for all ?rms by 21% and the entry rate for construction ?rms only by 29%.