Are Government Expenditures Productive? Measuring the Effect on Private Sector Production

This paper analyses the productivity of public expenditures. It follows the branch of literature originated by Aschauer but has also some novel features. First of all, it focuses on the effect of both public investment and public consumption (investment part of public consumption) on private sector productivity. Secondly, empirical evidence is derived from relative large cross-country data that cover more than three decades. For the testing purpose, it uses a production function approach in which (alternative definitions of) public sector capital stocks are allowed to affect total factor productivity. The production relationships are estimated from a panel data that are derived from the data banks of OECD and the World Bank. Empirical findings suggest that, to some extent, the significant deceleration of economic growth in many OECD countries during the last two decades can, in the same way as in the original Aschauer analysis with the US data, be explained by a secular decrease in public sector investment.