Spatial spillovers in public expenditure on a municipal level in Spain

A key function of local governments is to provide a wide array of public services. The supply of these services has been found to create spatial spillovers among neighbouring municipalities. Although it is generally agreed that spillovers are present in models that explain government expenditures, their type-whether endogenous, exogenous or residual-and sign-whether positive or negative-remain ambiguous. In most cases, a subjective process is used to select the type of spatial regression model used in analysis, with mixed results. Per capita expenditures of ten subprogrammes (Security, Housing, Welfare, Environment, Social services, Employment promotion, Health, Education, Culture and Sport) are analysed for all Spanish municipalities with more than 5000 inhabitants in the 2010-2012 period. A Spatial Seemingly Unrelated Regression methodology in a panel framework is used to incorporate correlation between different subprogrammes and spatial dependence. Our results show that the three types of spatial effects are present. Furthermore, substantive dependence is positive in most cases, while negative residual dependence is observed in some.