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The dual approach to the public capital hypothesis: the case of The Netherlands

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  • Jan-Egbert Sturm
  • Gerard H. Kuper,

Abstract

This paper uses a flexible functional form approach to account for the direct and indirect effects of public capital on the private sector. Furthermore we explicitly incorporate energy in the production function. We use the duality between production and cost functions and base our investigation on the estimation of a translog cost function for five manufacturing sectors of the Dutch economy. Our primary objective is to see whether public capital affects the production cost and factor-demand equations of the private sector and estimate several public capital elasticities. Our preliminary results presented in this paper should be interpreted with great care. In the first place there is severe autocorrelation in the model which means that the model is not specified correctly. In the second place the second-order conditions for cost minimization are violated in a number of cases. The problem of autocorrelation is solved by introducing a dynamic version of the model without public capital. The conclusions from the dynamic model are twofold. Autocorrelation is reduced, but the first and second-order conditions for minimizing costs are violated. Our results indicate that assessing the importance of public capital using a flexible cost function approach is difficult. The results found in the literature are not unambiguous either. Furthermore, autocorrelation might possibly be solved by rewriting the model as a truly dynamic model. However, in order to model the adjustment process a proper identification of the optimal shares is needed. Our impression is that the cost function approach does not provide us with reliable estimates for the optimal shares.

Suggested Citation

  • Jan-Egbert Sturm & Gerard H. Kuper,, 1996. "The dual approach to the public capital hypothesis: the case of The Netherlands," Working Papers 26, Centre for Economic Research, University of Groningen and University of Twente.
  • Handle: RePEc:wop:ccsowp:0026
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    References listed on IDEAS

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    1. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
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    4. Sturm, Jan Egbert & de Haan, Jakob, 1995. "Is public expenditure really productive?: New evidence for the USA and The Netherlands," Economic Modelling, Elsevier, vol. 12(1), pages 60-72, January.
    5. Keeler, Theodore E. & Ying, John S., 1988. "Measuring the benefits of a large public investment : The case of the U.S. Federal-aid highway system," Journal of Public Economics, Elsevier, vol. 36(1), pages 69-85, June.
    6. Chambers,Robert G., 1988. "Applied Production Analysis," Cambridge Books, Cambridge University Press, number 9780521314275.
    7. Shah, Anwar, 1992. "Dynamics of Public Infrastructure, Industrial Productivity and Profitability," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 28-36, February.
    8. Ernst R. Berndt & Bengt Hansson, 1991. "Measuring the Contribution of Public Infrastructure Capital in Sweden," NBER Working Papers 3842, National Bureau of Economic Research, Inc.
    9. Aschauer, David Alan, 1989. "Does public capital crowd out private capital?," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 171-188, September.
    10. Lynde, Catherine & Richmond, J, 1993. "Public Capital and Total Factor Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 401-414, May.
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    Cited by:

    1. Heinz Handler & Andreas Knabe & Bertrand Koebel & Margit Schratzenstaller & Sven Wehke, 2005. "The Impact of Public Budgets on Overall Productivity Growth," WIFO Working Papers 255, WIFO.
    2. Teruel, Romeo G. & Kuroda, Yoshimi, 2005. "Public infrastructure and productivity growth in Philippine agriculture, 1974-2000," Journal of Asian Economics, Elsevier, vol. 16(3), pages 555-576, June.

    More about this item

    Keywords

    dynamic cost function; public capital goods;

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • H4 - Public Economics - - Publicly Provided Goods

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