Contributions of public infrastructure investment to economic growth: New estimates using ridge regression

Brenda Killen Johnson, Fordham University

Abstract

The role of public expenditure has become a hotly debated topic. Initiated by David A. Aschauer, this debate is over the extent to which public expenditure increases private sector productivity growth. Aschauers' evidence that public expenditure has a strong, positive impact on economic output and productivity generated a strong reaction in the research community and opinions vary widely. This research examines the initial work produced by Aschauer and others who either attempted to confirm or disprove his results, and offers new insight into the relationship between public investment, transportation and economic growth.^ This research will show with robust and stable estimates, that the relationship between economic output and public infrastructure is significantly positive, consistent throughout the country, and in some instances, appear to be affected by interaction with other factors. An additional finding not previously observed elsewhere is that under perfect competition and profit maximizing behavior of the firms and households, output is fully distributed back to three factors, private capital, labor and government, when there are constant returns to scale. This research will also show that all components of public capital stock, particularly transportation are complementary to both private capital and labor. Finally, this research has empirically tested the level at which investment in public infrastructure is optimal.^ The methods employed during this research include the use of a ridge regression estimator (RR) rather than the ordinary least squares estimator (OLS) and other direct measures of public infrastructure as alternative estimation variables. Interaction variables were also used to evaluate the importance of factors which might enhance the impact of public infrastructure investments on economic growth. ^

Subject Area

Economics, General|Economics, Commerce-Business|Economics, Theory

Recommended Citation

Brenda Killen Johnson, "Contributions of public infrastructure investment to economic growth: New estimates using ridge regression" (January 1, 1997). ETD Collection for Fordham University. Paper AAI9730095.
http://fordham.bepress.com/dissertations/AAI9730095

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