The 'rationality' of municipal capital spending. Evidence from New Jersey

Some analysts interpret movements in capital spending by sub-federal levels of government as rational reactions to changing economic and demographic conditions. Others attribute changes to myopic decision-making by politically motivated government officials. In this paper we present a formal definition of 'rational' decision-making that is amenable to econometric testing, and utilize panel data on capital spending by a sample of New Jersey municipalities to test it. We find that on the basis of data from all communities, one cannot reject the joint hypotheses of forward-looking, rational, and unconstrained planning. However, the behavior of capital spending differs sharply between both suburban versus non-suburban communities, and between small versus large communities.