Wang, WenHou, Yilin2015-06-092015-06-092009-12Wang, W., & Hou, Y. (2009). Pay‐as‐You‐Go Financing and Capital Outlay Volatility: Evidence from the States over Two Recent Economic Cycles. Public Budgeting & Finance, 29(4), 90-107. http://dx.doi.org/10.1111/j.1540-5850.2009.00944.xhttps://hdl.handle.net/1805/6472Pay-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.en-USpay-as-you-gocapital outlayeconomicsArticle