Essays on Public Policy Evaluation: The Case of Spain's Supplier Payment Plan

Abstract

The 2008-14 economic crisis significantly worsened Spain's public finances, leading to increased budget deficits and public debt, as well as longer payment periods to vendors. As a result, unpaid invoices by subnational governments peaked in December 2011 at €28.5 billion (2.7% of GDP). In response, the central government launched the Supplier Payment Plan (SPP) in 2012 to address these overdue payments.

This dissertation evaluates the SPP, focusing on the causes of government arrears, the impact of delayed payments on corporations and procurement, and the role of politicians’ incentives in bailout agreements.

First, we find that the accumulation of arrears by Spanish municipalities through 2011 (intensive margin) was negatively influenced by construction activity, and positively influenced by current spending and interest payments. Additionally, we also find that construction activity is better at explaining the extensive (how many municipalities accumulate arrears) than the intensive margin. Finally, while our analysis indicates a positive relationship between arrears and the level of interest payments, it also reveals a negative relationship with their deviation from the within-group mean. This suggests municipalities with high interest payments, indicative of credit constraints, likely delayed payments to suppliers as a coping mechanism for limited market or bank credit access.

Second, we examine the impact of government late payments on firms, using the SPP as a natural experiment. We compare firms included in the plan's first phase with those omitted but repaid later, finding that repayment boosts corporate investment, decreases leverage, and enhances cash reserves. Financially constrained firms increase investment and reduce payables, benefiting the supply chain, while less constrained firms repay debt. Additionally, we also show how the buildup of arrears impairs procurement relationships, which are only restored upon repayment. Our findings underscore the adverse effects of procurement arrears as well as the efficacy of an unconventional fiscal policy with large real effects like the SPP.

Third, we hypothesize that borrowing from a lender of last resort reveals negative information about a government’s past economic performance, making officials with previous government responsibilities more reluctant to request financial assistance. We analyze the decisions made by around 4,000 Spanish municipalities under the SPP, find that newly elected local governments are 30 percentage points more likely than re-elected incumbents to publicly agree on a bailout from the central government. Evidence from news content analyzed using ChatGPT and politician surveys suggest incumbents avoid bailouts to protect their reputations, despite this being suboptimal for citizens.