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Public Expenditure and private firm performance: using religious denominations for causal inference

Author

Listed:
  • Henrique Alpalhão
  • Marta Lopes
  • João Pereira dos Santos
  • José Tavares
Abstract
We investigate the causal relationship between local government expenditure and private firm performance, using the quantity and naming of civil parishes within each municipality as an instrumental variable. Religious denominations are taken as a proxy for strong local identity, which likely increases competition for resources between neighboring parishes. We explore a dataset on the universe of private firms, local government expenditure categories and socio-economic indicators for all mainland Portuguese municipalities, in a period encompassing both normal and crisis times. The number of parishes per municipality, as exogenously set by the central government, and the number of parishes that display religious denominations are both used as instruments that explain local government spending, indirectly impacting firm performance. We find that both display considerable power in determining total primary and current spending, which then positively impacts private firms' sales and value added. Using religious denominations is found to yield a particularly potent instrument, confirming and expanding the baseline results. In a field that mostly relies on natural experiments for instrumental variable frameworks, our proposed instruments are both easily obtainable and powerful.

Suggested Citation

  • Henrique Alpalhão & Marta Lopes & João Pereira dos Santos & José Tavares, 2020. "Public Expenditure and private firm performance: using religious denominations for causal inference," GEE Papers 0151, Gabinete de Estratégia e Estudos, Ministério da Economia, revised Jun 2020.
    • Handle: RePEc:mde:wpaper:0151
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    File URL: https://www.gee.gov.pt//RePEc/WorkingPapers/GEE_PAPERS_151.pdf
    File Function: First version, 2020
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    More about this item

    Keywords

    instrumental variables; local governments; Local fiscal multiplier; firm performance; fragmentation; Local identity; religion;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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