Scale economies, returns to variety, and the productivity of public infrastructure

Douglas Holtz-Eakin, Mary E. Lovely

Research output: Contribution to journalArticle

70 Scopus citations

Abstract

We examine the productivity of public infrastructure in a general equilibrium context. In our model, infrastructure lowers costs in a manufacturing sector characterized by both firm-level returns to scale and industry-level external returns to variety. Infrastructure alters factor prices, intermediate prices and the allocation of factors across sectors. However, the effect on manufacturing or aggregate output is indeterminate. In particular, our theory suggests that the degree of monopoly power influences public capital's productivity effect. We test the model using state-level, panel data. We confirm the absence of direct effects on output, but find evidence to suggest a positive impact of public capital on manufacturing variety as measured by the number of manufacturing establishments. These results indicate the need for future research on potentially important indirect channels by which public capital affects manufacturing productivity.

Original languageEnglish (US)
Pages (from-to)105-123
Number of pages19
JournalRegional Science and Urban Economics
Volume26
Issue number2
DOIs
StatePublished - Apr 1996

Keywords

  • External scale economies
  • Public infrastructure

ASJC Scopus subject areas

  • Economics and Econometrics
  • Urban Studies

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