Regional productivity variation and the impact of public capital stockan analysis with spatial interaction, with reference to Spain

Resumen

In this paper we examine whether variations in the level of public capital across Spain’s Provinces affect productivity levels over the period 1971-2001. The analysis is motivated by contemporary urban economics theory, involving a production function for the competitive sector of the economy (‘industry’) which includes the level of composite services derived from ‘service’ firms under monopolistic competition. The outcome is potentially increasing returns to scale resulting from pecuniary externalities deriving from internal increasing returns in the monopolistic competition sector. We extend the basic production function by introducing public capital stock as an additional argument, leading to a simple and empirically tractable reduced form linking productivity level to density of employment, human capital and public capital stock. The model is also extended to include additional and necessary factors representing technological externalities which go unrepresented in the basic model. Using the methodology of spatial econometrics, we find plausible estimates for returns to scale and for the various covariates, but the effect of public capital is not significantly different from zero. This reflects some of the earlier research findings which also leave the question of the impact of public capital as yet unresolved.