Public infrastructure capital, scale economies and returns to variety

manufacturing sector of the economy and investigates the role of public capital on the increase or
decrease of varieties, using the number of establishments as a proxy for the latter.

Even though there is now a small body of work on the results of public capital on the
industrial sector of Greek economy (see Dalamagas 1995, Rovolis and Spence 1995, 1997a, 1997b,
1998, Segoura and Christodoulakis 1997) there is a notable absence (here as elsewhere) of research
regarding effects on the non-manufacturing sector. The main reason for this is the absence of some
key data regarding private capital investment and employment in sectors other than manufacturing.
Thus, the application of production function analysis, not to mention the more data demanding cost
function approach, seems impossible in this important part of the economy. However, there is an
alternative approach, such as the use of quasi-production functions, which can give some indication
for the impact of public capital.

Quasi-production functions have already been used in infrastructure research. In fact one of
the most significant pieces of research at the regional level - the Biehl report (1986) for the EU - has
used this approach extensively. However, here a slightly different implementation of quasi-production
functions has been followed (forced upon by the data limitations), which in no small measure follows
and develops upon that of Cutanda and Paricio (1994). These authors, interested in the relationship
between public capital and regional economic growth in Spain, estimated a function of the type:

Y_i = a + b₁ E_i + b 2 I_i + e                                                            (35)

where Yi is the per capita regional income, Ei the employment rate in industry, Ii an infrastructure
indicator, and e the error term.

One of the problems with the empirical analysis of Cutanda and Paricio is that, due to their
data limitations, the time dimension they used is restricted to a specific point in time. It is, effectively,
a cross sectional analysis.

Here for Greece, a panel data model is used in order to provide the necessary information for
both the time and spatial dimensions. More particularly, data for 49 prefectures of Greece were used
for the period 1982 to 1991. The prefectures vector is derived from the official Greek prefectures
(NUTS III according to the EU classification). However, the industrial data for employment, which
are used in the analysis, imposed several limitations. Thus, as a result, it proved necessary to exclude
Lefkada, where there was no industrial activity during the period, and to add the statistics for
Kephalonia to those of the adjacent prefecture of Zakynthos (for a more extensive analysis, see
Rovolis and Spence 1997b, 1998). The data for infrastructure have been purged of purely accounting
expenditures (represented by Miscellaneous and Administrative Expenditures sub-categories) and
what remains is pure investment in the public capital. The various categories of public capital

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