On the Substitution of Private and Public Capital in Production

Zidong An, Alvar Kangur and Chris Papageorgiou ()

No 2019/232, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; production function; public capital; private capital; elasticity of substitution; substitution parameter; approximation method; point estimate; estimation result; confidence interval; coefficient estimate; Stocks; Public investment and public-private partnerships (PPP); Private investment; Human capital; Global (search for similar items in EconPapers)
Pages: 34
Date: 2019-11-01
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Citations: View citations in EconPapers (13)

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Journal Article: On the substitution of private and public capital in production (2019)
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