Infrastructure and production efficiency in Italian regions. A stochastic frontier approach (26)

Theme Track: Regional Competitiveness - Infrastructure and Human Capital

Author:
Percoco, Marco

The role of public infrastructure in stimulating productivity growth and reducing production costs has received increasing attention from both policy makers and researchers. The former have generally maintained that public capital enhances economic performance, and have been mainly concerned with where to invest, in what, and how much. The latter, on the other hand, have recently taken a step back and investigated whether a positive effect of public capital can indeed be taken for granted. Hulten (1996) argued that the existence of an infrastructure effectiveness problem is thus well-documented. What is not well known is the actual magnitude of the penalty that inefficiency imposes on economic growth. To this end, a technical efficiency indicator is developed by using a stochastic production frontier approach at a regional level. The stochastic frontier production function, proposed independently by Aigner, Lovell and Schmidt (1977) and Meeusen and van den Broeck (1977), is motivated by the idea that deviations from the production frontier might not be entirely under the control of the region being studied. Worse yet, any error of imperfection in the specification of the model or measurement of its constituent variables could likewise translate into increased inefficiency measures. This is an unattractive consequence of the deterministic frontier specification. A more reasonable interpretation is that any particular region faces their own production frontier and that frontier is randomly placed by the whole collection of stochastic elements which might enter the model outside the control of the region. The setting in which our empirical analysis is carried out is Italian regions in the period 1970-94. This setting is particularly interesting in view of the growing efforts on behalf of European institutions to integrate the economies of member countries and promote growth in relatively backward areas. In fact, Italy reproduces within itself many of the contrasts and differences that exist among European countries: the productive structure and the level of development of Italian regions varies widely, going from the rich and industrialized regions of the North to the relatively poor regions of the South. Understanding the differential impact of infrastructure investment in these areas can therefore shed some light on the role that public investment at the European level can serve to promote economic growth in relatively backward regions. In this sense, our analysis shares the motivation of the work by De la Fuentes and Vives (1995), who have studied the role of public investment in education and infrastructure in reducing regional disparities in Spain. Results indicate that Italian regions inefficiency levels are significantly and positively correlated with the ratio of public capital to private capital. The proportion of public capital devoted to highways is negatively correlated with technical inefficiency, suggesting that not only level but also the composition of public capital influences state efficiency.

Keywords: Infrastructure, growth, technical efficiency

JEL Classification: H54, C80

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