Testing Public Capital Budgeting and Management Theory Using Panel Data Analysis Methods

Abstract

This case study relates the author’s experience while testing public capital budgeting and management theory using panel data analysis methods. The case suggests that, in contrast to what most people tend to believe, the quantitative research approach requires certain existing theories to set up a research hypothesis and establish a testing model in addition to using econometric knowledge and skills. This is because most quantitative approaches are for theory testing, rather than theory building, and as such, accumulated observations of public practices derived from the public finance literature is necessary. Furthermore, for panel data, serial correlation problem resulting in co-integration is equally important to control for the effects of time-invariant factors. Both problems yield seriously biased results causing a researcher to believe that there are effects of the independent variable, when in fact, there are none. This latter problem, the time-invariant factors, is relatively easy to address compared with dealing with the first problem, serial correlation and necessary co-integration.

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