Introduction

The role of public infrastructure in stimulating productivity growth and reducing production costs has received increasing attention from both policy-makers and researchers. The former have generally maintained that public capital enhances economic performance, and have been mainly concerned with where to invest, in what, and how much. The latter, on the other hand, have recently taken a step back and investigated whether a positive effect of public capital can indeed be taken for granted. Findings on this point have been mixed, depending on the theoretical models, econometric techniques and datasets used. The ambivalence of the results challenges the rationale for public infrastructure provision as an input in the growth process, a serious issue for policy-makers. This chapter attempts to shed light on the relationships between public infrastructure, total factor productivity and production costs, both in theory and in practice. From a methodological point of view, our contribution is a critical comparison of the main competing approaches to evaluating the returns to public investment, highlighting the conditions under which they should yield the same results. On the empirical side, we implement the different methodologies using the same dataset, a task that, to the best of our knowledge, has not yet been undertaken.

The setting in which our empirical analysis is carried out is the Italian regions in the period 1970–94.