Does fiscal decentralization foster regional investment in productive infrastructure?

•We analyse the effect of decentralization on regional infrastructure investment.•We use panel data covering 20 European countries over the period 1990-2009.•We find that regional infrastructure investment increases with decentralization.•Investment in redistribution is not affected by decentralisation.•The positive effect of decentralization declines if earmarked grants are provided.

The aim of this paper is to analyze the effect of revenue decentralization on the provision of infrastructure at the sub-national level. We estimate the effects of revenue decentralization and earmarked grant financing on the level of sub-national infrastructure investment in 20 European countries over the period 1990-2009. The results are interpreted in light of the predictions of the theory on fiscal federalism. We find that it is sub-national infrastructure investment that increases after revenue decentralization and not investment in redistribution. However, the effect of revenue decentralization is lower the higher the use of earmarked grants to fund infrastructure investment.