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Identifying The Channels Between Public Expenditure In Core Infrastructure And Private Investment

856 words - 3 pages

Abstract
The purpose of this paper is to identify the channels between the public expenditure in core infrastructure and private investment. Profitability and lack of financial constraints considered as the major effects for corporate investment. For this purpose a large panel data of US firms as well as the economic results of the majority of the states. The results show that the infrastructure affect the costs and the revenues of the firms and as a result their profitability. The level of this affect depends on the state and economic sector each firm belongs to.

1. Introduction
Public expenditure is essential for the sound function of the economy. For all the countries around the world the dominant questions are how much to spend and of course where it would be more effective for the common wealth. As we can understand the literature around this subject is plentiful. The first published work was by Aschauer (1989), in which a strong positive relationship between public capital and gross domestic product of the U.S. economy was revealed. In favor of these findings other researchers as Munnel (1990) and Morrison and Schwartz (1996) find evidence of positive effect in economic activity.
During this period other researchers questioned the plausibility of Aschauer’s findings due to the econometric issues that aroused. Stationary time series, heterogeneity and endogeneity in the model made it vulnerable in criticism. Researchers as Holtz-Eakin (1994), Evans and Karras (1994) and Baltagi and Pinnoi (1995) proved that after the removal of the econometric issues the relationship between public expenditure and output disappears. Of course the importance of infrastructure could not be questioned as public health and national security for example are important but unfortunately intangible factors. On the other hand economy without roads, bridges, ports and rail services is impossible to think of so the differences in results may arouse because of the difficulty in disentangling results in economy to separated factors of public expenditure and especially in different type of infrastructure.
In this paper will be attempted to introduce a different angle to the subject. As public expenditure will be taken into account the expenditure in core infrastructure and how this as one of the factors affects the investment decisions of firms. For these decisions it must be considered also the market imperfections that exist. In a perfect market where we can borrow as much as we need the existence of different infrastructure among a country would not have a major role but in reality a different channel must be concerned. Firms that function in better infrastructure areas would have more power in negotiations. Financial...

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