[go: up one dir, main page]

IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2019-232.html
   My bibliography  Save this paper

On the Substitution of Private and Public Capital in Production

Author

Listed:
  • Zidong An
  • Mr. Alvar Kangur
  • Mr. Chris Papageorgiou
Abstract
Most macroeconomic models assume that aggregate output is generated by a specification for the production function with total physical capital as a key input. Implicitly this assumes that private and public capital stocks are perfect substitutes. In this paper we test this assumption by estimating a nested-CES production function whereas the two types of capital are considered separately along with labor as inputs. The estimation is based on our newly developed dataset on public and private capital stocks for 151 countries over a period of 1960-2014 consistent with Penn World Table version 9. We find evidence against perfect substitutability between public and private capital, especially for emerging and LIDCs, with the point estimate of the elasticity of substitution estimated closely around 3.

Suggested Citation

  • Zidong An & Mr. Alvar Kangur & Mr. Chris Papageorgiou, 2019. "On the Substitution of Private and Public Capital in Production," IMF Working Papers 2019/232, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2019/232
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=48720
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Caselli, Francesco, 2005. "Accounting for Cross-Country Income Differences," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 9, pages 679-741, Elsevier.
    2. Robert C. Feenstra & Robert Inklaar & Marcel P. Timmer, 2015. "The Next Generation of the Penn World Table," American Economic Review, American Economic Association, vol. 105(10), pages 3150-3182, October.
    3. Brent Neiman, 2014. "The Global Decline of the Labor Share," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(1), pages 61-103.
    4. Christophe Kamps, 2006. "New Estimates of Government Net Capital Stocks for 22 OECD Countries, 1960-2001," IMF Staff Papers, Palgrave Macmillan, vol. 53(1), pages 1-6.
    5. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
    6. Caselli, Francesco & Wilson, Daniel J., 2004. "Importing technology," Journal of Monetary Economics, Elsevier, vol. 51(1), pages 1-32, January.
    7. Duffy, John & Papageorgiou, Chris, 2000. "A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
    8. Peter Pedroni, 2000. "Fully Modified OLS for Heterogeneous Cointegrated Panels," Department of Economics Working Papers 2000-03, Department of Economics, Williams College.
    9. Caselli, Francesco, 2005. "Accounting for cross-country income differences," LSE Research Online Documents on Economics 5266, London School of Economics and Political Science, LSE Library.
    10. César Calderón & Enrique Moral‐Benito & Luis Servén, 2015. "Is infrastructure capital productive? A dynamic heterogeneous approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(2), pages 177-198, March.
    11. Thursby, Jerry G & Lovell, C A Knox, 1978. "An Investigation of the Kmenta Approximation to the CES Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(2), pages 363-377, June.
    12. Era Dabla-Norris & Jim Brumby & Annette Kyobe & Zac Mills & Chris Papageorgiou, 2012. "Investing in public investment: an index of public investment efficiency," Journal of Economic Growth, Springer, vol. 17(3), pages 235-266, September.
    13. Turnovsky,Stephen J., 2011. "Capital Accumulation and Economic Growth in a Small Open Economy," Cambridge Books, Cambridge University Press, number 9780521187527, September.
    14. Francesco Caselli & James Feyrer, 2007. "The Marginal Product of Capital," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(2), pages 535-568.
    15. Stokey, Nancy L, 1996. "Free Trade, Factor Returns, and Factor Accumulation," Journal of Economic Growth, Springer, vol. 1(4), pages 421-447, December.
    16. Gupta, Sanjeev & Kangur, Alvar & Papageorgiou, Chris & Wane, Abdoul, 2014. "Efficiency-Adjusted Public Capital and Growth," World Development, Elsevier, vol. 57(C), pages 164-178.
    17. Chatterjee, Santanu & Turnovsky, Stephen J., 2012. "Infrastructure and inequality," European Economic Review, Elsevier, vol. 56(8), pages 1730-1745.
    18. repec:oup:qjecon:v:129:y:2013:i:1:p:61-103 is not listed on IDEAS
    19. Ward Romp & Jakob De Haan, 2007. "Public Capital and Economic Growth: A Critical Survey," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 8(S1), pages 6-52, April.
    20. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    21. Pedro R.D. Bom & Jenny E. Ligthart, 2014. "What Have We Learned From Three Decades Of Research On The Productivity Of Public Capital?," Journal of Economic Surveys, Wiley Blackwell, vol. 28(5), pages 889-916, December.
    22. Gomme, Paul & Rupert, Peter, 2007. "Theory, measurement and calibration of macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 460-497, March.
    23. Paul Gomme & Peter Rupert, 2004. "Measuring labors share of income," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Nov.
    24. Peter Pedroni, 2001. "Purchasing Power Parity Tests In Cointegrated Panels," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 727-731, November.
    25. Christophe Kamps, 2006. "New Estimates of Government Net Capital Stocks for 22 OECD Countries, 1960-2001," IMF Staff Papers, Palgrave Macmillan, vol. 53(1), pages 1-6.
    26. Agénor, Pierre-Richard, 2010. "A theory of infrastructure-led development," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 932-950, May.
    27. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
    28. K. Sato, 1967. "A Two-Level Constant-Elasticity-of-Substitution Production Function," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 34(2), pages 201-218.
    29. Mr. Serkan Arslanalp & Fabian Bornhorst & Mr. Sanjeev Gupta & Ms. Elsa Sze, 2010. "Public Capital and Growth," IMF Working Papers 2010/175, International Monetary Fund.
    30. Simon Koesler & Michael Schymura, 2015. "Substitution Elasticities In A Constant Elasticity Of Substitution Framework - Empirical Estimates Using Nonlinear Least Squares," Economic Systems Research, Taylor & Francis Journals, vol. 27(1), pages 101-121, March.
    31. Caselli, Francesco, 2005. "Accounting for cross-country income differences," LSE Research Online Documents on Economics 3567, London School of Economics and Political Science, LSE Library.
    32. Hulten, Charles R. & Wykoff, Frank C., 1981. "The estimation of economic depreciation using vintage asset prices : An application of the Box-Cox power transformation," Journal of Econometrics, Elsevier, vol. 15(3), pages 367-396, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bom, Pedro R.D. & Erauskin, Iñaki, 2022. "Productive government investment and the labor share," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 347-363.
    2. An, Zidong, 2023. "Financial reforms and capital accumulation in developing economies: New data and evidence," China Economic Review, Elsevier, vol. 77(C).
    3. Divino, Jose Angelo & Maciel, Daniel T.G.N. & Sosa, Wilfredo, 2020. "Government size, composition of public spending and economic growth in Brazil," Economic Modelling, Elsevier, vol. 91(C), pages 155-166.
    4. Tamai, Toshiki, 2023. "The rate of discount on public investments with future bias in an altruistic overlapping generations model," European Journal of Political Economy, Elsevier, vol. 79(C).
    5. Qiang Wang & Thomas Dogot & Yueling Yang & Jian Jiao & Boyang Shi & Changbin Yin, 2020. "From “Coal to Gas” to “Coal to Biomass”: The Strategic Choice of Social Capital in China," Energies, MDPI, vol. 13(16), pages 1-22, August.
    6. An, Zidong & Zhang, Feinan & Li, Haibo, 2022. "Elasticity of substitution between public and private capital: Evidence from manufacturing firms in Europe," Economics Letters, Elsevier, vol. 219(C).
    7. Espinoza Raphael & Gamboa-Arbelaez Juliana & Sy Mouhamadou, 2024. "The Fiscal Multiplier of Public Investment: The Role of Corporate Balance Sheet," The B.E. Journal of Macroeconomics, De Gruyter, vol. 24(1), pages 489-527, January.
    8. Kalamov, Zarko Y. & Zimmermann, Karl J., 2023. "GDP-linked bonds and economic growth," Journal of International Money and Finance, Elsevier, vol. 137(C).
    9. Cusato Novelli, Antonio & Barcia, Giancarlo, 2021. "Sovereign Risk, Public Investment and the Fiscal Policy Stance," Journal of Macroeconomics, Elsevier, vol. 67(C).
    10. Chatterjee, Santanu & Lebesmuehlbacher, Thomas & Narayanan, Abhinav, 2021. "How productive is public investment? Evidence from formal and informal production in India," Journal of Development Economics, Elsevier, vol. 151(C).
    11. Hallegatte, Stéphane & Jooste, Charl & McIsaac, Florent, 2024. "Modeling the macroeconomic consequences of natural disasters: Capital stock, recovery dynamics, and monetary policy," Economic Modelling, Elsevier, vol. 139(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Li, Y. & Murshed, S.M. & Papyrakis, E., 2021. "Public capital and income inequality: some empirical evidence," ISS Working Papers - General Series 677, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.
    2. Gupta, Sanjeev & Kangur, Alvar & Papageorgiou, Chris & Wane, Abdoul, 2014. "Efficiency-Adjusted Public Capital and Growth," World Development, Elsevier, vol. 57(C), pages 164-178.
    3. Jones, C.I., 2016. "The Facts of Economic Growth," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 3-69, Elsevier.
    4. Renato Santiago & Matheus Koengkan & José Alberto Fuinhas & António Cardoso Marques, 2020. "The relationship between public capital stock, private capital stock and economic growth in the Latin American and Caribbean countries," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 67(3), pages 293-317, September.
    5. Nelson C. Modeste, 2021. "Efficiency-adjusted Public Capital and Economic Growth in Guyana: A Cointegration Analysis," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 49(2), pages 187-199, June.
    6. Bom, Pedro R.D. & Erauskin, Iñaki, 2022. "Productive government investment and the labor share," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 347-363.
    7. Giovanni Ganelli & Juha Tervala, 2020. "Welfare Multiplier of Public Investment," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(2), pages 390-420, June.
    8. Trofimov, Ivan D., 2020. "Public capital and productive economy profits: evidence from OECD economies," MPRA Paper 106848, University Library of Munich, Germany.
    9. Kose,Ayhan & Ohnsorge,Franziska Lieselotte & Ye,Lei Sandy & Islamaj,Ergys, 2017. "Weakness in investment growth : causes, implications and policy responses," Policy Research Working Paper Series 7990, The World Bank.
    10. Francesco Caselli & Wilbur John Coleman II, 2006. "The World Technology Frontier," American Economic Review, American Economic Association, vol. 96(3), pages 499-522, June.
    11. Michael Knoblach & Fabian Stöckl, 2020. "What Determines The Elasticity Of Substitution Between Capital And Labor? A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 847-875, September.
    12. Alexander Monge-Naranjo & Juan M. Sánchez & Raül Santaeulàlia-Llopis, 2019. "Natural Resources and Global Misallocation," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(2), pages 79-126, April.
    13. Era Dabla-Norris & Jim Brumby & Annette Kyobe & Zac Mills & Chris Papageorgiou, 2012. "Investing in public investment: an index of public investment efficiency," Journal of Economic Growth, Springer, vol. 17(3), pages 235-266, September.
    14. García-Belenguer, Fernando & Santos, Manuel S., 2013. "Investment rates and the aggregate production function," European Economic Review, Elsevier, vol. 63(C), pages 150-169.
    15. Mello, Marcelo de Albuquerque e, 2017. "Another Look at Panel Estimates of the Elasticity of Substitution between Capital and Labor," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 37(2), November.
    16. Battisti, Michele & Gatto, Massimo Del & Parmeter, Christopher F., 2022. "Skill-biased technical change and labor market inefficiency," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    17. Carmen D. Ã lvarez-Albelo, 2018. "A calibration of the output elasticity of public capital," Economics Bulletin, AccessEcon, vol. 38(2), pages 761-771.
    18. Matthew K. Heun & João Santos & Paul E. Brockway & Randall Pruim & Tiago Domingos & Marco Sakai, 2017. "From Theory to Econometrics to Energy Policy: Cautionary Tales for Policymaking Using Aggregate Production Functions," Energies, MDPI, vol. 10(2), pages 1-44, February.
    19. Vetlov, Igor & Ferdinandusse, Marien & de Jong, Jasper & Funda, Josip, 2017. "The effect of public investment in Europe: a model-based assessment," Working Paper Series 2021, European Central Bank.
    20. Andreas P. Kyriacou & Leonel Muinelo-Gallo & Oriol Roca-Sagalés, 2018. "The efficiency of transport infrastructure investment and the role of institutions: an empirical analysis," Working Papers. Collection B: Regional and sectoral economics 1802, Universidade de Vigo, GEN - Governance and Economics research Network.

    More about this item

    Keywords

    WP; production function; public capital; private capital; elasticity of substitution; substitution parameter; approximation method; point estimate; estimation result; confidence interval; coefficient estimate; Stocks; Public investment and public-private partnerships (PPP); Private investment; Human capital; Global;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2019/232. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.