Regional infrastructure and firm investment: theory and empirical evidence for Italy

The authors model the channels through which public expenditure on infrastructure influences firm value and shapes its investment decisions via both adjustment costs and marginal profitability of capital. The authors test these hypotheses using a large panel of Italian firms. Empirical results show that infrastructure interacts with revenues and costs in shaping firm??s capital profitability and influences its adjustment costs. Finally, the authors find that infrastructure expenditure contributes to the reduction of the economic gap between the North and the South of Italy. These effects vary across regions and sectors.