Highway infrastructure and private output: evidence from static and dynamic production function models

Abstract

Much of the previous empirical literature that evaluates the relationship between public capital and productivity using a production function approach has not allowed for lagged responses of productivity to public capital. Using panel data for 48 contiguous US states over the period 1984–1997, this article demonstrates the importance of using correctly specified dynamics to examine the contribution of highway capital to state productivity. We find that the imposition of static production function models tends to overestimate the short-run effect of highways while underestimating the long-run effect. More plausible results are found when accounting for dynamic adjustments of state output and these show that both the short-run and long-run effects of highway capital are positive but fairly small, even after including positive productivity spillovers from highways located in other states.