Private-Public Capital, Elasticity of Substitution and Economic Growth

Abstract

In the growth literature, Cobb-Douglas (CD), Constant Elasticity of Substitution (CES), and Variable Elasticity of Substitution (VES) production functions are frequently used in analyzing the elasticity of substitution between production factors. Most of the studies in the literature focus on the elasticity of substitution between capital and labor. However, studies on the sub-components of the capital stock are very scarce. In this thesis, the aggregate capital stock is analyzed by splitting it into two subcomponents, namely, public capital stock and private capital stock. The elasticity of substitution between public capital stock and private capital stock has been examined for 91 countries using the data for the period 1980-2011 in the framework of a nested VES type production function. The main advantage of the VES production function over other functions is that it provides more flexibility in the parameters. The parameters related to the VES production function are estimated by the help of nonlinear least squares (NLLS) method. Findings of the thesis revealed that the elasticity of substitution between public capital stock and private capital stock is found to be negative in most models. Further, public capital stock and private capital stock are complements in the production of final goods and services. Therefore, public investments that are directed at improving infrastructure can positively affect economic growth by increasing the efficiency of private investments.