THE IMPACT OF PUBLIC INFRASTRUCTURE CAPITAL ON REGIONAL MANUFACTURING PRODUCTION COST

The paper presents an analysis of the impact of public infrastructure capital on manufacturing production cost in the 11 (West) German states. We present a simple theoretical model of a cost-minimizing firm in which the stock of public capital is included as a proxy for public services provided to firms as a fixed unpaid factor of production. Duality theory is used to recover the productivity effects of public infrastructures by calculating the cost-saving effects that are associated with public services. Using a translog cost function we present panel estimates for the manufacturing industry in the 11 states of (West) Germany with labour, buildings and machinery as private factors of production. The results strongly indicate significant cost reducing effects of public infrastructure services and suggest that public capital formation encourages private investment.