On the interaction between public and private capital in economic growth

This paper introduces two forms of interaction between private and public capital in an endogenous growth model in which productive government expenditure takes the form of a stock-variable and public capital is used in part as an input in the production of final output and in part to increase its own supply. While the first form of interaction involves the stocks of the two capital-goods and takes place within the final output sector through the specification of the aggregate production function (Cobb?CDouglas vs. CES), the second one concerns the rates of investment in the two kinds of capital. The share of productive public expenditure devoted to output production can be either exogenous or endogenous. Our results suggest that when this share is exogenous, along the balanced growth path the optimal growth rate of the economy is a positive function of the degree of complementarity between the two forms of investment. When the share of productive public expenditure devoted to output production is endogenous, the public capital share in GDP becomes, along with the model??s preference parameters, an important determinant of the economy??s long run growth. We also find that the optimal growth rate is an increasing function of the elasticity of substitution between public and private capital inputs in goods production, and is independent of the complementarity/substitutability between the two forms of investment.     

Public policy,footloose capital,and union influence

This document sets up a unionized general oligopolistic equilibrium model of countries, where capital is footloose and governments maximize utilitarian welfare. When capital owners have weak influence on public policy, there is unemployment and the governments compete for jobs, causing a distortion with suboptimal wages. Then globalization—as characterized by a decrease in impediments to international investment—increases the wage elasticity of capital flight, decreasing wages and increasing employment. This benefits the capital owners and the unemployed workers getting a job, but harms the other workers. International coordination of public policy alleviates these consequences of globalization.     

A normative analysis of public capital

A normative analysis of short-term public capital investment is carried out using cost benefit analysis. This cost benefit approach explicitly incorporates the durability of capital into the computation and thus include an aspect of public capital omitted from previous studies which focus on productivity. Estimation methods used else where have been improved by properly handling several concerns that have been raised. In addition, this behavioural model yields many structural equations suitable for estimation which results in highly efficient parameter estimates. Although a small elasticity is found for public capital, the benefit is greater than the cost.     

Distributional Effects of Public Education in an Economy with Public Pensions*

We study how the allocation of government expenditures between two major outlays—education and pay‐as‐you‐go social security—affects human capital distribution in an economy with heterogeneous agents. We consider an overlapping generations economy where the government maintains both programs, and allocates tax revenues to finance them. In our model, human capital is one of the factors of production. It is itself produced as a combined result of public inputs and private inputs. Parents' decisions to invest time and material resources in education of their children are motivated by altruism, heterogeneous in its strength across the population, which leads to heterogeneity of incomes. We investigate the effect of an increase in public funding for education on the human capital distribution. We show that in this framework, contrary to some earlier results, increased spending on public education may lead to higher inequality. Our results depend crucially on the interaction of education funding with the social security budget and on the elasticity of substitution in the learning technology.     

Public investment and private capital formation in a vector error-correction model of growth

Most of the literature dealing with the impact of public investment on private capital formation and economic growth focuses either on cross-section or static analysis. However, investigation of the long-run dynamic interactions between private and public investment and growth is much more insightful for public policy aiming at the determination of the appropriate size of its public sector. This paper extends the model of Barth and Cordes (1980) and uses multivariate cointegration techniques to develop a vector error-correction model useful for investigating the long-run effects of public investment on private capital formation and economic growth. We apply our methodology to a developing country implementing the IMF debt-stabilization programmes and show how, in this country, public investment is having a negative short-run impact on private investment and a negative long-run impact on both private investment and economic growth.     

Fiscal policy, long‐run growth, and welfare in a stock‐flow model of public goods

Abstract.  We introduce public capital and public services as inputs in an endogenous growth model. We show that the growth rate depends on the apportionment of tax revenues between the accumulation of public capital and the provision of public services. When public spending is financed by proportional income taxes, the growth rate, the level of public spending as a proportion of GDP, the level of investment in public capital as a proportion of total public spending, and the level of private investment as a proportion of total private spending all are lower in the equilibrium outcome than in the optimal outcome. JEL classification: E62, O40     

Optimal composition of government public capital financing

Most recent studies on growth models with public investment in infrastructure (public capital) presume that public capital is financed by income taxation. However, in the model where money is demanded for transactions, this paper finds that optimal public capital financing in general involves utilizing both income taxation and seigniorage. In such a case, the optimal income tax rate is less than the output elasticity of public capital, a reasonable result compared with empirical evidence.     

The impact of public capital on the US private economy: new evidence and analysis

This paper presents new evidence on the impact of public capital on the productivity of the US private sector. Using a production function approach, we estimate the impact of public investment on private capital productivity, specifically addressing the empirical critiques of earlier studies. We find evidence of a cointegrating relationship in a dynamic specification of an empirical model that includes public infrastructure as a factor of production, indicating the existence of a long‐run relationship between the US public capital stock and the productivity of the private capital stock. The results are used to explore how the decline in the growth rate of the public capital stock would have affected the performance of the private sector.     

政府公共资本投资的长期经济增长效应

本文首先建立一个包含政府公共资本投资的两部门内生增长模型,并把公共资本投资分为政府物质资本投资和人力资本投资,从而对公共资本投资的长期经济增长效应进行理论分析。结论是,两种形式的公共资本投资对长期经济增长都可能具有正效应也可能具有负效应,取决于民间经济主体消费跨时替代弹性大小。其次,我们利用向量自回归分析框架,对我国1978—2004年间公共资本投资对长期经济增长的影响作实证分析。结论是,我国两种形式的公共资本投资与经济增长之间存在着长期均衡关系,其中政府公共物质资本投资对长期经济增长的正影响更为显著,而政府公共人力资本投资对长期经济增长的正影响较小,且在短期内不利于经济增长。这一结论对我国今后科学制定财政政策和选择公共投资领域都具有重要意义。     

Influence and inefficiency in the internal capital market

I model inefficient resource allocations in M-form organizations due to influence activities by division managers that skew capital budgets in their favor. Corporate headquarters receives two types of signals about investment opportunities: private signals that can be distorted by managers, and public signals that are undistorted but noisy. Headquarters faces a tradeoff between the cost of attaining an accurate private signal and the value of the information the signal provides. In contrast to existing models of “socialism” in internal capital markets, I show that investment sensitivity to Tobin's Q is higher than first-best in firms where division managers hold equity (a result consistent with evidence presented in Scharfstein, 1998). When managers face high private costs from distorting information (equity holdings), headquarters may commit to investment contracts that place “too little” weight on private signals and “too much” weight on public signals (i.e. Q). This result has implications for managers in the design of capital budgeting processes and incentive compensation systems.     

Capital markets and capital allocation: Implications for economies in transition*

Recent work showing that a sounder financial system is associated with faster economic growth has important implications for transition economies. Stock prices in developed economies move in highly firm‐specific ways that convey information about changes in firms’ marginal value of investment. This information facilitates the rapid flow of capital to its highest value uses. In contrast, stock prices in low‐income countries tend to move up and down en masse, and thus are of scant use for microeconomic capital allocation. Some transition economy markets are coming to resemble those of developed economies, others those of low‐income countries. Stock return asynchronicity is highly correlated with the strength of private property rights in general and public shareholders’ rights in particular. Other recent work suggests that small entrenched elites in low‐income countries preserve their sweeping control over the corporate sectors of their economies by using political influence to undermine the financial system and deprive entrants of capital. The lack of cross‐sectional independence in some transition economies’ stock returns may be a warning of such economic entrenchment. Sound property rights, solid shareholder rights, stock market transparency, and capital account openness appear to check this, and thus contribute to efficient capital allocation and economic growth.     

Labour market effects of public capital stock: evidence for the Spanish private sector

This paper provides a new rationale for the positive effect of public capital stock on employment and wages. We show that higher levels of public capital reduce wages along the wage equation and enhance employment due to the resulting larger elasticity of labour demand with respect to wages. The estimation of a structural model for the Spanish private sector reveals that this wage channel is empirically relevant. We use the estimated parameters to simulate the recent incidence of the ratio of public to private capital stock on the private sector economic performance. We find (i) sizeable effects on employment, capital stock and gross domestic product, and (ii) that the wage channel is particularly important for employment.     

Rates of return to public and private capital: new estimates using nonlinear Euler equations

Results obtained by Otto and Voss show that public investment undertaken in Australia over recent decades satisfies conditions for intertemporal efficiency. This paper confirms this result, although lower output elasticities and rates of return to private and public capital are obtained. The reason for these results is that the earlier work is extended by estimating the parameter related to the elasticity of intertemporal substitution that was earlier restricted to a specific value. In fact, it is shown here that it is possible to obtain an economically reasonable (and statistically significant) estimate of this parameter by assuming that the stochastic discount factor for the representative firm is the same as for the representative consumer and equal to a gross real interest rate.     

Efficiency‐adjusted public capital,capital grants,and growth

A debate on whether capital grants, and especially European Union (EU) funds, actually contribute to growth has gained prominence lately. This article empirically assesses the relationship between the quality of public investment, capital grants, and growth in a sample of 43 emerging and peripheral economies over 1991–2015. To this end, the contribution of public capital to growth is estimated using efficiency‐adjusted public capital stock series, which reflects the quality of public investment management institutions. In addition, the determinants of effective public investment are analyzed. The results suggest that capital grants contribute positively to effective public investment, and the latter is significant in explaining variations in economic growth. Finally, the article illustrates the impact of raising EU funds absorption on potential growth in emerging and peripheral EU countries.     

Public capital,deficit financing,and economic growth in a stochastic economy

This paper examines the relationship among deficit-financing fiscal policy, risk and economic growth in a stochastic endogenous growth model with private and public capital. We show that there are positive balanced-growth rate and a debt-to-GDP ratio that depend on deep parameters such as the income tax rate and the standard deviation of the growth rate of private and public capital. Investment and fiscal shocks influence the mean and variance of the growth rate and the debt dependency rate through portfolio changes and capital accumulation. In particular, an increase in the risk of private investment destabilizes the economy and reduces the mean growth rate if the portfolio change is drastic, and this increase in risk increases the debt-to-GDP ratio. In contrast, an increase in the income tax rate stabilizes the economy, increases the mean growth rate, and has a positive or negative effect on the debt-to-GDP ratio according to the ratio of public to private capital if the income tax rate is sufficiently small.     

The relationship between regional value-added and public capital in Finland: what do the new panel econometric techniques tell us?

This article applies recently developed panel estimation techniques to estimate the elasticity of private production with respect to public capital in a regional framework. We use the widely applied production function approach and regional data from Finland for the 1975–2004 period. In contrast to many previous studies about the productivity of public capital, we focus especially on panel estimation techniques, showing that the results from commonly applied fixed effects OLS are probably biased and sensitive to a change of estimator. To get more reliable results, we use the panel DOLS and panel DSUR estimators. The results suggest that public capital has had a positive impact on private production.     

Evidence of public capital spillovers and endogenous growth in Taiwan

This study reaffirms the empirical evidence of public capital spillovers and endogenous growth by using data for the period 1966Q3–2012Q3 in Taiwan. Avoiding the use of a 100% depreciation rate for generating public and private capital stock series that is applied in some related studies, this study estimates these series by using disaggregate data of various investment assets and applying their individual depreciation rates, as calculated by Jorgenson and Stiroh (2000). The results show that, first, (per capita) output, private capital stock, and public capital stock cointegrated in the sample period. Second, the contribution of private capital to output is 50% higher than that of public capital. Third, in the presence of significant and sizeable public capital spillover effects, growth in Taiwan is strictly endogenous. Finally, the dynamic model with a cointegration equation helps in studying some sensible short-run properties of the model and bi-directional effects among variables.     

On the long run effect of public capital on aggregate output: Estimation and sensitivity analysis

We undertake a sensitivity analysis of the productivity of public capital under the aggregate production function approach. Several proxies are used for the private inputs and for public capital, several dummy variables are included to adjust for energy price shocks, newly revised data is studied, and Stock and Watson's dynamic OLS estimator is used. Our main results are that the productivity of public capital depends critically on the proxies used, the effects are typically smaller than the early estimates, and omitting the oil price shocks introduces significant upward bias in the measured productivity of public capital. First version received: January 1998/final version received: June 1999     

FUND SUBSTITUTION AND THE INCENTIVE EFFECT OF PUBLIC INVESTMENT SUBSIDIES

This paper analyses the observed phenomenon of public for private fund substitution in industrial assistance, by examining the public and private sector funding of investment under different assumptions about the nature of the private capital market. This bears on the effectiveness of industrial subsidies, and has implications for welfare and the design of optimal assistance contracts. It is shown that fund substitution depends crucially on the elasticity of investment with respect to the user cost of capital in the without-subsidy position, and on the nature of any amount and rate constraints on the assistance contract.     

Public Investment, Congestion, and Private Capital Accumulation

This paper analyses the impact of public investment on the dynamics of private capital formation in an intertemporal optimising market-clearing framework. The key feature characterising the analysis is that the public good is treated as a durable capital good, subject to congestion. We show how in the presence of congestion the effect of government investment on private capital formation involves a tradeoff between the degree of substitution between private and public capital in production and the degree of congestion. Both lump-sum and distortionary tax financing are considered, with this tradeoff being tightened in the latter case