Municipal Construction Spending: An Empirical Examination

Despite widespread concern and discussion, no consensus exists concerning the causes of the "infrastructure crisis." We investigate several models of the determination of local public capital expenditures. Using Euler equation methods, we find that the hypothesis that construction spending is determined by unconstrained, forward looking municipal planning cannot be rejected. consistent with this result, we find that the stochastic structure of own revenue and grant flows is an important feature of the determination of construction spending. Only unanticipated changes in a community's resources alter its demand for structures. An unanticipated increase in resources of one dollar increases current construction spending by about 5.5 cents.