Productivity Effects and Determinants of Public Infrastructure Investment

This study aims to investigate two important issues: whether or not public infrastructure contributes to production in the private sector, and whether or not political economy factors such as political situations, lobbying factors, and the availability of national grants for investment affect the allocation of public infrastructure investment. We estimate simultaneous equations by using a panel data set of 46 prefectures in Japan for 5 time periods from 1975 to 1990. From the empirical results, we conclude the following: (1) public capital contributes to productivity, (2) the investment behavior of the national government is efficiency-oriented for private productivity but equity-oriented for the capital stock level, (3) the complementarity of public capital investment between the national and the prefectural government could hold, (4) there is no clear political factor in the national government' s public investment function, and (5) the availability of national government grants for the construction of infrastructure boosts investment among prefectural governments.