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On the capacity to absorb public investment: How much is too much?☆

Daniel Gurara, Kangni Kpodar (), Andrea Presbitero and Dawit Tessema

World Development, 2021, vol. 145, issue C

Abstract: While expanding public investment can contribute to fill infrastructure gaps, scaling up too much and too fast often leads to inefficient outcomes. This paper rationalizes this outcome looking at the association between cost inflation and public investment in a large sample of road construction projects in developing countries. Consistent with the presence of absorptive capacity constraints, our results show a non-linear U-shaped relationship between public investment and project costs. Unit costs increase once public investment is close to 10% of GDP. This threshold is lower (about 7% of GDP) in countries with low investment efficiency and, in general, the effect of investment scaling up on costs is especially strong during investment booms.

Keywords: Public investment; Absorptive capacity; Unit costs; Investment efficiency; Road infrastructure (search for similar items in EconPapers)
JEL-codes: H5 L7 R4 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:wdevel:v:145:y:2021:i:c:s0305750x21001376

DOI: 10.1016/j.worlddev.2021.105525

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