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Output and Employment Effects of Public Policy


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  • David Alan Aschauer

    (The Jerome Levy Economics Institute)


Over the past decade, a considerable amount of research has been conducted on the relationship between "public capital" or "infrastructure capital" and economic performance. Since the initial work of Aschauer (1989), researchers have used a variety of data sets of investigate an even wider variety of hypotheses regarding the linkages between public capital and the economy. In particular, many authors have made use of state level data to look at the importance of infrastructure to productivity (e.g., Munnell (1990)), to costs of production in manufacturing sectors (e.g., Holtz-Eakin and Schwartz (1995)). This paper, along with Aschauer (1997b), also makes use of state level data to consider the static and dynamic effects of the provision of public capital on economic growth. The basic notion is that a nonlinear relationship can be expected to arise between the level of the public capital stock--relative to the private capital stock--and output and employment growth at the state level. This nonlinearity might be due to a variety of reasons. One such reason, given by Barro (1990) and, by extension, Aschauer (1997a), is that the benefits of public capital rise at a diminishing rate but the costs of providing public capital (e.g., through distorting taxation) rise at a constant rate. Another (related) reason, explored in Arrow and Kurz (1970), is that at any particular point in time the aggregate capital stock is misallocated unless the marginal product of public capital equals the marginal product of private capital. Both of these arguments imply that there should exist an output (and, by extension, an employment) growth maximizing level of the public capital stock relative to the private capital stock. For relatively low levels of public capital, increased public investment raises the economic growth rate; but for relatively high levels of public capital, increased in public investment decreases growth.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 9711002.

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Length: 63 pages
Date of creation: 05 Nov 1997
Date of revision:
Handle: RePEc:wpa:wuwpma:9711002

Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 63; figures: included
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Cited by:
  1. Pellervo Hamalainen, 2009. "Review of literature on the productivity of public capital," Discussion Papers 55, Aboa Centre for Economics.
  2. Alfredo M. Pereira & Oriol Roca Sagales, 2006. "Public Infrastructures and Regional Asymmetries in Spain," Working Papers 46, Department of Economics, College of William and Mary, revised 30 Mar 2007.
  3. Pal, Sarmistha, 2010. "Public infrastructure, location of private schools and primary school attainment in an emerging economy," Economics of Education Review, Elsevier, vol. 29(5), pages 783-794, October.
  4. Sarmistha Pal, 2008. "Public Infrastructure, Location of Private Schools and Quality of Schooling in an Emerging Economy," CEDI Discussion Paper Series 08-05, Centre for Economic Development and Institutions(CEDI), Brunel University.


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