Evaluating the Effect of Public investment on Productivity Growth Using an Urban Economics Approach for the Spanish Provinces

Abstract

In this article, the authors examine whether variations in the level of public capital across Spain’s Provinces affect productivity growth over the 1985–2004 period. The analysis is motivated by contemporary urban economics theory, involving a production function for the competitive sector of the economy (industry), which includes the level of composite services derived from “service” firms under monopolistic competition. The authors extend the basic production function in the industry sector by explicitly introducing public capital stock and human capital in order to quantify its impact on regional economic growth. The model is also extended to include additional and necessary factors representing technological externalities and spillovers which are not represented in the basic model. The authors use spatial econometric panel data estimation techniques and when we control for temporal and regional specific effects, overall infrastructural endowment boosts regional labor productivity. The results are not significant when we disaggregate public capital stock into local and transport components, although the magnitude of the coefficient is greater in the former case.