Pay-as-You-Go Financing and Capital Outlay Volatility: Evidence from the States Over Two Recent Economic Cycles

18 Pages Posted: 15 Dec 2009

See all articles by Wen Wang

Wen Wang

City University of Hong Kong (CityUHK)

Yilin Hou

Maxwell School, Syracuse University

Abstract

Pay-as-you-go (pay-go or cash) and pay-as-you-use (pay-use or debt) are two mechanisms to finance capital projects. While pay-go faces multiple constraints, pay-use smoothes outlays, stabilizes tax rates, and improves inter-generational equity. Thus, pay-use has dominated infrastructure financing for decades. In recent years, there has been revived academic interest in pay-go as an alternate financing mechanism; however, there is a large gap in the literature and inadequate evidence on the effects of pay-go, especially its effects on capital outlay volatility. This paper fills in the niche. Examining state experience over the two recent economic cycles, this paper finds evidence that suggests that pay-go is associated with lower volatility in capital spending in the long run, but may increase short-run variability. We recommend that states couple pay-go in boom years with pay-use in lean years. In unison, the two mechanisms can reduce aggregate volatility and increase long-run stability of capital expenditures.

Suggested Citation

Wang, Wen and Hou, Yilin, Pay-as-You-Go Financing and Capital Outlay Volatility: Evidence from the States Over Two Recent Economic Cycles. Public Budgeting & Finance, Vol. 29, Issue 4, pp. 90-107, Winter 2009, Available at SSRN: https://ssrn.com/abstract=1521824 or http://dx.doi.org/10.1111/j.1540-5850.2009.00944.x

Wen Wang

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Yilin Hou

Maxwell School, Syracuse University ( email )

426 Eggers Hall
Syracuse, NY 13244-1020
United States
315-443-3114 (Phone)

HOME PAGE: http://www.maxwell.syr.edu/pa/cpr/Hou,_Yilin/

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