Should the Private Sector Provide Public Capital?

The choice between private and government provision of a productive public good like infrastructure (public capital) is examined in the context of an endogenously growing open economy. The accumulation of public capital need not require government provision, in contrast to the standard assumption in the literature. Even with an efficient government, the relative costs and benefits of government and private provision depend crucially on the economy’s underlying structural conditions, borrowing constraints in international capital markets, and installation costs. Countries with limited substitution possibilities and large production externalities may benefit from governments encouraging private provision of public capital through targeted investment subsidies. On the other hand, countries with flexible substitution possibilities and relatively smaller externalities may benefit either from governments directly providing public capital, or from regulation of private providers. The transitional dynamics are also shown to depend on the underlying elasticity of substitution and the size of the production externality