On the Substitution of Private and Public Capital in Production

By Zidong An, Alvar Kangur, Chris Papageorgiou

November 1, 2019

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Zidong An, Alvar Kangur, and Chris Papageorgiou. On the Substitution of Private and Public Capital in Production, (USA: International Monetary Fund, 2019) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Most macroeconomic models assume that aggregate output is generated by a specification for the production function with total physical capital as a key input. Implicitly this assumes that private and public capital stocks are perfect substitutes. In this paper we test this assumption by estimating a nested-CES production function whereas the two types of capital are considered separately along with labor as inputs. The estimation is based on our newly developed dataset on public and private capital stocks for 151 countries over a period of 1960-2014 consistent with Penn World Table version 9. We find evidence against perfect substitutability between public and private capital, especially for emerging and LIDCs, with the point estimate of the elasticity of substitution estimated closely around 3.

Subject: Expenditure, Financial institutions, Human capital, Labor, National accounts, Private investment, Public investment and public-private partnerships (PPP), Stocks

Keywords: Approximation method, Coefficient estimate, Confidence interval, Elasticity of substitution, Estimation result, Global, Human capital, Point estimate, Private capital, Private investment, Production function, Public capital, Public investment and public-private partnerships (PPP), Stocks, Substitution parameter, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/232
Stock No:

WPIEA2019232
ISBN:

9781513518572
ISSN:

1018-5941

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