A1188
Title: Revisiting the public capital productivity puzzle
Authors: Zhezhi Hou - Southwestern University of Finance and Economics (China) [presenting]
Abstract: Although public capital is crucial in production and economic growth, most empirical studies that assume Cobb-Douglas production technology find that the estimated returns of the public capital are either negative or statistically insignificant when fixed effects are controlled. It is hypothesized that these counterintuitive estimates may be due to restrictive functional forms and/or ignoring cross-sectional dependence in the estimation of the production technology. To investigate this hypothesis, several semi/nonparametric models are deployed with fixed effects and/or multi-factor error structures to reexamine the impact of public capital on state GDP in the U.S. from 1970 to 1986. After going through a battery of models, positive, neutral effects, negative non-neutral effects, and heterogeneous overall effects of public capital on output are found. The heterogeneity helps explain the negative or insignificant effects estimated from a constant elasticity parametric model, which captures only the mean/median effect. It is also found that controlling cross-sectional dependence tends to increase the above estimates. In addition, when public capital is disaggregated into its components, positive effects for the water and sewer systems, mixed effects for the highways, and negative effects for other buildings are found.
