EMANES Working Paper No 64: When Capital Falls to Pieces : Public Investment and The Role of Private Capital Stock

February 24, 2023
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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.