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Optimal endowments of public investment: an empirical analysis for the Spanish regions

  • Bajo-Rubio, Oscar

    ()

  • Diaz-Roldan, Carmen

    ()

  • Montavez-Garces, M. Dolores

    ()

Following Aschauer's (1989) influential contribution, the role of public investment has been stressed as a crucial factor leading to higher private capital productivity, which would lead in turn to higher growth rates. According to this author, the decline in productivity growth experienced by the US economy during the seventies, would explained to a great extent by the decrease in the provision of public infrastructures during that period. In this way, the next years have witnessed the appearance of a great amount of empirical literature that analysed the impact of public investment on economic growth. Although the first empirical studies made use of aggregate time series for countries, this approach has been also extended to a regional framework using panel data, obtaining results that were quantitatively lower than those found with aggregate data. The reason would be the spillover effects related to the regional endowments of public capital, whose effect would extend not only the own region, but also to the neighbouring regions. In any case, public infrastructure seems to play an important role in the growth process of regions that should not be neglected. On the other hand, the issue of the optimal endowments of public infrastructure has been hardly discussed. In a recent paper, Karras (1997) has developed a simple condition to assess whether public capital is optimally provided, namely, whether the marginal productivities of both private and public capital are equal or not. By estimating a simple growth equation for fifteen European countries during the period 1960-1992, he is unable to reject the null hypothesis that the marginal productivities of private and public capital are equal, so that government investment would be neither underprovided nor overprovided in the fifteen countries of his sample. In this paper we try to address this issue (i.e., whether the endowments of public investment are optimal or not) in a regional framework, using Spanish data for the period 1967-91. Unlike Karras (1997), who assumes that the production function exhibits constant returns to scale in all factors, we are able to generalise his condition without the need of this constraint. On the other hand, the Spanish economy can provide an interesting case of study, since it has experienced a sustained period of growth in the last forty years, which has been accompanied by a strong process of structural change. In particular, the establishment of new regional governments after the restoration of democracy in 1977, coupled with the strong increase experienced by public investment since them, are all of them elements that can justify the interest of the Spanish case for the objectives of this paper. Therefore, in this paper we will first derive the theoretical condition under which public capital would be optimally provided, and then we will provide an empirical application of the model, for the case of the Spanish regions during the period 1965-1995.

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Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa02p214.

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Date of creation: Aug 2002
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Handle: RePEc:wiw:wiwrsa:ersa02p214
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  1. Óscar Bajo Rubio & Carmen Díaz Roldán & M.a Dolores Montávez Garcés, . "Fiscal Policy And Growth Revisited: The Case Of The Spanish Regions," Working Papers 19-02 Classification-JEL , Instituto de Estudios Fiscales.
  2. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
  3. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
  4. repec:fda:fdaeee:01 is not listed on IDEAS
  5. Harris, Richard D. F. & Tzavalis, Elias, 1999. "Inference for unit roots in dynamic panels where the time dimension is fixed," Journal of Econometrics, Elsevier, vol. 91(2), pages 201-226, August.
  6. Holtz-Eakin, Douglas, 1994. "Public-Sector Capital and the Productivity Puzzle," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 12-21, February.
  7. Jan-Egbert Sturm & Gerard H. Kuper & Jakob de Haan,, 1996. "Modelling government investment and economic growth at the macro level: A review," Working Papers 29, Centre for Economic Research, University of Groningen and University of Twente.
  8. de la Fuente, Angel, 2002. "Is the Allocation of Public Capital Across the Spanish Regions too Redistributive?," CEPR Discussion Papers 3138, C.E.P.R. Discussion Papers.
  9. Banerjee, Anindya, 1999. " Panel Data Unit Roots and Cointegration: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 607-29, Special I.
  10. Carmela Martin & Francisco J. Velazquez., 2001. "An Assessment of Real Convergence of Less Developed EU Members: Lessons for the CEEC Candidates," European Economy Group Working Papers 5, European Economy Group.
  11. Karras, Georgios, 1997. "Is Government Investment Underprovided in Europe? Evidence from a Panel of Fifteen Countries," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 50(2), pages 223-235.
  12. Berndt, Ernst & Hansson, Bengt, 1992. "Measuring the Contribution of Capital in Sweden," Working Paper Series 365, Research Institute of Industrial Economics.
  13. Ezequiel Uriel Jiménez & Francisco Pérez García & Matilde Mas Ivars & Joaquín Maudos Villarroya, 1995. "Infrastructures And Productivity In The Spanish Regions," Working Papers. Serie EC 1995-10, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  14. Berndt, Ernst R & Hansson, Bengt, 1992. " Measuring the Contribution of Public Infrastructure Capital in Sweden," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(0), pages S151-68, Supplemen.
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