Augmented Solow Model with Mincerian Schooling and Infrastructure Externalities

According to Crescezni and Rodriguez-Pose (2008) backward European regions should follow balanced strategies in which infrastructure development is coordinated with policies aimed at developing human capital and the innovative potential of regions. In order to asses their postulates we extend the analysis of Carstensen et al. (2009) further augmenting the neoclassical Solow Model to incorporate both Mincerian schooling externalities and infrastructure externalities in a single theoretical framework. Infrastructure is introduced into the model in a manner similar to Hicks-neutral technological change – potentially rising overall efficiency of economy. We do not assume ax ante the existence of positive externality. Solving the model we obtain a structural equation which is then econometrically tested in order to obtain estimates of both education and infrastructure externalities for a group of European states. Estimates for panel data model bring interesting results. Infrastructure and education externalities are both postitive and statistically significant. The education externality is however significantly stronger for CEE countries while infrastructure externality is not statistically significant for the same group of countries.