The Effect of Public Infrastructure on the Private Productive Sector of Spanish Regions

In this paper we analyze the effect of infrastructure on the cost and productivity performance of the private productive sector of Spanish regions over the period 1980–1993. We use a dual approach based on cost functions that allows us to recover the usual parameters estimated with production functions. In addition, we obtain rates of return and cost elasticities of production factors at the regional level. Our framework explicitly considers that some factors are quasi‐fixed and their volume can differ from their optimal endowment levels. Our results indicate that the public sector has contributed significantly to enhance productivity and reduce costs in the private sector of almost every Spanish region. Nevertheless, there is still scope for the government to continue its investment efforts, given that there remains an appreciable gap between observed and optimal public capital, and we find that in the long run, public capital promotes private investment.