Working Paper: NBER ID: w3981
Authors: Catherine J. Morrison; Amy Ellen Schwartz
Abstract: The impact of public infrastructure investment on the productive performance of firms has been an important focus of the recent literature on productivity growth. The size of this impact has important implications for policymakers' decisions to invest in public capital, and productivity analysts' evaluation of productivity growth fluctuations and declines. However, detailed evaluation of the infrastructure impact is difficult using existing studies which rely on restricted models of firms' technology and behavior. In this paper we construct a more complete production theory model of firms' production and input decisions. We then apply our framework to state-level data on the output production and input (capital, nonproduction and production labor and energy) use of manufacturing firms to evaluate the contribution of infrastructure to firms' costs and productivity growth. We find that infrastructure investment does provide a significant direct benefit to manufacturing firms and thus augments productivity growth. We also show, however, that this evidence should be interpreted taking into account the social cost of such capital (which is not reflected in firms' costs), and the indirect impact resulting from scale effects.
Keywords: Public Infrastructure; Productivity Growth; Manufacturing; Cost Function; Scale Economies
JEL Codes: H54; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Public infrastructure investment (H54) | Productivity growth (O49) |
| Public infrastructure investment (H54) | Manufacturing firms (L60) |
| Manufacturing firms (L60) | Productivity growth (O49) |
| Infrastructure investment (H54) | Productivity growth (O49) |
| Infrastructure investment (H54) | Social costs not reflected in firms' costs (J32) |