provided by Research Papers in Economics
Public infrastructure capital, scale economies and returns to variety - DRAFT
PREPARED FOR 39th CONGRESS OF THE ERSA, 23-27 AUGUST, DUBLIN
Antonis Rovolis and Nigel Spence
Department of Geography, London School of Economics, Houghton Street, London WC2A 2AE and
Department of Geography, Queen Mary and Westfield College, Mile End Road, London E1 4NS
[email protected]
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Abstract
The recent resurgence of research on infrastructure has basically used simple production and cost
functions. The results obtained have given some indications of the relationship between public
infrastructure and economic and regional growth, though the direction of this relationship still remains
somewhat unclear. Even more recently different ways of approaching this relationship have been
developed that involve the construction of economic growth models incorporating public capital as a
basic parameter. There are several differently formulated examples in the literature but one is of
particular relevance here. Holtz-Eakin and Lovely (1996) sought to model a small, open economy,
with two sectors, one producing consumption goods and the other finished manufactured goods. In
this economy there are two production inputs - labour and capital - and the basic question posed
concerns the likely effects of an increase in public capital. This paper is about the role of public capital
in the development of different sectors and regions of the Greek economy. First, the findings for the
non-manufacturing sector of the economy are considered. More specifically, the role of the impact of
public capital on the regional Gross Domestic Product and its sub-categories are analysed using of
quasi-production functions. Second, the manufacturing sector is considered in terms of the Holtz-
Eakin and Lovely model. This delineates two channels by which infrastructure affects the secondary
sector: one by altering the scale of production (and subsequently the level of total manufacturing
output) and the other by affecting the equilibrium number of manufacturing establishments or returns
to variety. Empirically, the paper approaches these themes on four different spatial levels.
1 Introduction
The recent resurgence of infrastructure research has basically used production and cost
function analytical frameworks. The empirical results obtained by these approaches have given some
indications as to the relationship between the public infrastructure and economic and regional growth,
even though the direction of this relation still remains somewhat unclear in some cases (see
Gramlich’s (1994) review essay, Sturm’s (1998) book, and the collected volumes edited by Munnell