Public Infrastructure and Private Productivity: A Stochastic-Frontier Approach

We estimate an aggregate production frontier using time-series data for the private U.S. economy and show that estimated technical inefficiency is negatively correlated with the stock of public capital, or infrastructure. We then estimate a production frontier which includes a public-capital variable and report that this variable has no statistically significant effect on private productivity. Our results suggest that public capital affects private productivity indirectly by reducing aggregate technical inefficiency rather than directly by increasing output. Consequently, previous evidence indicating a positive, direct effect of public capital on average private-sector output may have been obtained from stochastically misspecified models.