The Short Run Relationship Between Investment in Public Infrastructure and the Formation of Private Capital
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Date
1986-06
Authors
Deno, Kevin T.
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon
Abstract
In recent years, the condition of the nation's public infrastructure has become an issue of heightened concern. Several studies have concluded that the deterioration of roads, bridges, water and sewer facilities, and mass transit systems has reached alarming proportions and that massive public investment is needed to reverse this trend. These studies, though, do not take into account the impact of public infrastructure on the production decisions of private industry. The failure to consider this relationship is due primarily to the scarcity of empirical studies on this issue. Hence, the aim of this study is to fill this void in the economic literature by estimating the short run relationship between public capital outlay and net private investment.
The estimation of this relationship is based on an export base model of a regional economy in which public capital enters the production process of the basic sector as an unpaid, exogenous input. The amount of public capital supplied to the basic sector is determined by the median voter of the region. The model is then closed by assuming that the median voter's income is dependent upon the wage bill of the basic sector which itself is affected by the amount of public capital supplied by the local governments in the region. This model generates the basic sector's demand equations for labor and net private investment as functions of output, relative input prices, and public investment.
These short run, input demand equations were estimated using two samples of SMSA's, growing and declining, for the period 1970 to 1978. Private and public capital were found to exhibit a relatively weak, substitutive relationship in growing regions (the estimated, short run, input demand elasticity with respect to public capital outlay is -0.224). The estimated, short run elasticity for declining regions is ten times smaller (i.e., -0.023). These findings suggest that private industry can substitute private capital for nonexistent or inadequate public infrastructure but that this ability is not great and differs between growing and declining regions.
Description
210 pages
Keywords
public infrastructure, private capital, regional economy, empirical estimation, regional model, budgetary tradeoffs