Regional productivity growth and investments in public infrastructure: the case of Germany

This paper examines whether the productivity growth in the West-German states is influenced by the provision of public infrastructure. Medium-term labour productivity growth and output growth varies a lot between German states. This differences are more pronounced during the eighties. The traditional total factor productivity shows a smaller difference than labour productivity. The regional differences in the productivity growth rates can only partly be attributed to the differences in factor input growth. We estimate a translog-cost-function for the period 1970-1988 for 11 German states using a three-equation fixed-effects panel data model. We show that there are important cost-saving effects that are associated with public services. Likewise, the demand for labour, and the private investment demand for structures and equipment is effected by public capital goods. Our estimates indicate that public capital formation encourages private investment. This effect is especially strong with respect to the private demand for structures. These results confirm that regional or urban economic growth can be forstered by the government by public investment.