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Abstract
The size and significance of public infrastructure investment impacts on costs and
productivity of private enterprise, and thus on economic health and growth, has proven
nebulous to empirically substantiate. Various studies using alternative theoretical and
econometric methodologies, and for different time periods, sectors, and countries, have
tentatively established that such a productive impact exists and is statistically significant. It
also seems smaller and more variable over time, space, and sector than was implied by
initial studies on the “public capital hypothesis”. One piece of the puzzle that has received
little attention, however, is the role of spatial spillovers in driving infrastructure investment
benefits. Such spillovers are not only conceptually important, but could also shed light on
discrepancies between studies for different data, and particularly aggregation levels. In this
study we apply a cost-based model to state-level U.S. manufacturing data, for capital,
production and non-production labor, and materials inputs, and for the 1982-96 time period,
in an attempt to untangle the private cost-saving contributions of inter- and intra-state public
infrastructure investment. We carry out two kinds of spatial adaptations – a spatial
autocorrelation adjustment and a spatial spillover theoretical modification – to the estimating
system consisting of a Generalized Leontief cost function and input demand equations, to
address this issue. We find that intra-state public infrastructure benefits appear larger in
magnitude when inter-state spillovers are directly recognized, as well as being invariably
statistically significant. Inter-state spillovers are also directly beneficial to manufacturing
firms, although their contribution appears smaller in size when temporal serial correlation is
recognized in addition to spatial correlation.