Does Public Infrastructure Affect Regional Performance?

Abstract

Does public infrastructure affect state output? This paper uses both a Cobb‐Douglas and a translog production function to examine the impact of public infrastructure spending on state output. Like labor and private capital, the stock of public capital is considered to be an input into the production process. The data are based on Alicia Munnell's work and were provided by the Federal Reserve Bank of Boston. Unlike many of the earlier studies employing Ordinary Least Squares (OLS) techniques, this analysis employs estimating methods that take advantage of the longitudinal nature of the data set. While these methods lend support to the public capitol hypothesis, there is evidence that studies relying on OLS have reported a coefficient on public capital that is upward biased. This paper, which controls for heterogeneity in the data, finds the coefficient on public capital to be smaller than that presented in previous studies. This finding has important policy implications. It indicates that while investment in public capital may have a positive impact on the private sector, this impact will be much smaller than predicted by previous studies. Copyright © 1995, Wiley Blackwell. All rights reserved