Factor mobility, government debt and the decline in public investment

This paper aims at explaining the declining level of public investment in OECD countries. The theoretical framework hints to the relevance of a number of demand and supply factors—ranging from the yield of public investment to institutions like the EU deficit limits. The econometric results indicate that the decline is due to three developments: first to the increase in the public capital stock; second to the pile-up of public debt which has restricted the ability to finance new investment; and third to the increasing mobility of factors adding to the financing difficulties. In contrast to that neither the privatisation process nor EU deficit restrictions of the Maastricht Treaty have a robustly significant impact.

Friedrich HeinemannEmail: URL: www.zew.de