2005•35
Productivity Effects and Determinants of
Public Infrastructure Investment

Fumitoshi Mizutani
Tomoyasu Tanaka

Mizutani & Tanaka

Productivity Effects and Determinants of Public Infrastructure Investment*
Fumitoshi Mizutani
Kobe University, Graduate School of Business Administration
2-1 Rokkodai, Nada-ku, Kobe 657-8501 JAPAN(Tel) +81-78-803-6905(Fax) +81-78-803-6977(E-mail) toshi@kobe-u.ac.jp

andTomoyasu Tanaka
Osaka Prefectural Institute for Advanced Industry Development
My-Dome Osaka 5th Floor
2-5 Honmachi-bashi, Chuo-ku, Osaka 540-0029 JAPAN(Tel) +81-6-6947-4363(Fax) +81-6-6947-4369(E-mail) TanakaTomo@mbox.pref.osaka.lg.jp[Abstract]:
This study aims to investigate two important issues: whether or not public infrastructure contributes to
production in the private sector, and whether or not political economy factors such as political situations,lobbying factors, and the availability of national grants for investment affect the allocation of public
infrastructure investment. We estimate simultaneous equations by using a panel data set of 46
prefectures in Japan for 5 time periods from 1975 to 1990. From the empirical results, we conclude thefollowing: (1) public capital contributes to productivity, (2) the investment behavior of the national
government is efficiency-oriented for private productivity but equity-oriented for the capital stock level,(3) the complementarity of public capital investment between the national and the prefectural government
could hold, (4) there is no clear political factor in the national government’s public investment function,and (5) the availability of national government grants for the construction of infrastructure boosts
investment among prefectural governments.

[JEL Classification] H50, H54, R53[Key Words] Public Capital, Public Capital Investment, Infrastructure, Political Factors for Investment*

Part of this paper has been supported by funds from the 21st century COE program (Research,
Development and Education Center for Advanced Business Systems) of Kobe University by the Ministryof Education, Culture, Sports, Science and Technology.

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Mizutani & Tanaka

Productivity Effects and Determinants of Public Infrastructure Investment

Fumitoshi Mizutani and Tomoyasu Tanaka

1. Introduction
Inefficient use of public money is a policy issue of concern in Japan.

Some contend

that spending towards the formation of public capital does not promote economic growth, one
reason being that such investment is concentrated in underdeveloped regions which have a low
impact on the growth of economic activity.

Investment in underdeveloped regions might be

the result of political misallocation or simply the fact that public capital no longer contributes toprivate productivity.

Our study addresses these two important issues: whether or not public

infrastructure contributes to production in the private sector, and whether or not political
economy factors such as political situations, lobbying factors and the availability of national
grants for investment affect the allocation of public infrastructure investment.

If the political

economy factors indeed affect the allocation of public capital investment, what factors are themost deterministic?
There are three distinguishing characteristics of our study.

First, we will analyze

public capital’s effect on private productivity, considering the regional allocation of the national
government’s public capital investment.

Although there have been many studies evaluating

public capital’s private productivity, there has not been much research considering public
investment while also estimating public capital’s productivity effects.

Studies by Duffy-Denoand Eberts (1991) and Kemmerling and Stephen (2002) analyze the determinants of public2

Mizutani & Tanaka

investments as well as the private production process by using simultaneous equations.

Our

study may be characterized secondly by our consideration of both the national and theprefectural governments’ public investment.

Although our approach is similar to that of

Kemmerling and Stephen (2002), they do not include both kinds of government.

Third, weconsider several factors for the determinants of public capital investment: efficiency/equity
reason for private productivity and capital stock level, lobbying factors, political factors, andfiscal conditions.

Several previous studies investigate the determinants of public capital

investment and/or the formation of public capital.

For example, Crain and Oakley(1995)

investigate political factors.

Kemmerling and Stephen (2002) consider lobbying factors aswell as political factors.

Kamada, Okuno and Futagami (1998) try to investigate howsocio-economic conditions such as income growth rate per capita and population growth rateaffect the regional allocation of public capital investment.

We hope that our approach, with its

three characteristics, answers some of the main questions.
The structure of this paper consists of four parts after the introduction.
second section, we will describe previous published studies related to this topic.

In theIn this section

we will explain the empirical evidence on private productivity related to public capital, thesimultaneous approach of considering both private production and public capital investment,
and determinants for public capital investments. In the third section, the whole structure of themodel will be explained.

For methodology, as we take a simultaneous approach to examine

these issues, we will explain the structure of four equations: private production, public capitalformation, the national government’s public capital investment and the prefectural government’s
public capital investment functions.

Empirical analysis will be done in the fourth section,

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where we will, first, describe the empirical models and hypotheses to test and, second, explain
the data set for public infrastructure and related variables.

Public capital in this study islimited to public infrastructure such as roads, ports, airports, banks and dams.

Railroads andelectric power plants are excluded because these were built by the private sector in Japan. In
this study, we plan to use a panel data set covering 46 prefectures and 5 time periods for every 5
years from 1975 to 1995 in Japan, making the total sample size in this study 230.

Last, we will

estimate simultaneous equations regarding regional production function, public capitalformation function, and both governments’ infrastructure investment functions. By using theseestimated functions, we evaluate whether or not public capital contributes to production andwhat kind of political factors affect the allocation of public infrastructure investment.

In theconclusion, we will summarize the major points.

2. Previous Studies on Productivity Effects and Allocation of Public Capital
There have been many studies on whether or not public capital contributes to productionin the private sector.

In this section, we will summarize previous studies which focus on

public capital’s productivity while considering the allocation of public capital (as for an
overview on public capital, see Gramlich (1994)). First, using time-series data for the wholecountry, it is commonly shown that public capital contributes to private production.

For

example, Ratner (1983), Aschauer(1989) and Vijverberg et al. (1997) for the U.S. and Iwamoto(1990) for Japan show the positive contribution of public capital.

However, if the regions andkinds of public capital are divided into smaller categories, then the estimation results of public
capital on productivity vary among studies.

For example, Munnell (1990) and Garcia-Mila

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and McGuire (1992), by analyzing U.S. data, find that some components of public capital such
as Highway, Water Supply and Disposal, and Education contribute positively to private
production. However, Evans and Karras (1994) show a quite different result: while the public
capital of education is productive, there is no evidence that other government stock is
productive. In Japan, empirical results are not consistent.

Mitsui et al. (1995) show that core

infrastructure of public capital makes a positive contribution but that there is no clear evidence
that non-core infrastructure does so.

Ida and Yoshida (1999) show that public capital such asindustry, living and environment are positive but that others such as education and land security
make a negative contribution.
There are several studies which consider public capital investment and its allocation
among regions.

For example, Duffy-Deno and Eberts (1991) consider the linkage between

public investment and personal income, arguing that public investment influences personal
income through the regional production process, while maintaining that the determination of thelevel of public infrastructure is a consumption good in the median household’s utility function.
Therefore, Duffy-Deno and Eberts believe that public investment and personal income shouldbe estimated simultaneously.

They estimate these two simultaneous equations by using a data

set of 28 SMSAs in the U.S. from 1980 to 1984.

Their results show that public investment andpublic capital stock have a positive effect on personal income and that personal income has apositive effect on public investment.
Kemmeling and Stephan (2002) also consider both regional production and public
investment.

Their study is characterized by the fact that the simultaneous equations consist of

the regional production function, the public investment function and the grant allocation5

Mizutani & Tanaka

function.

Kemmeling and Stephan consider the political factors which affect public investment

and grant allocation.

They estimate these three equations simultaneously by using a data set of

87 German cities for 1980, 1986 and 1988.

The results they obtained are the following.

local public capital contributes positively to private production.

First,

Second, political affiliation isdecisive in explaining the distribution of investment grants across cities.

Third, there is noevidence of a complementary relationship between matching investment grants andinfrastructure spending.
Although Kemmeling and Stephan’s (2002) is the most recent study of how politicalfactors affect public investment, Crain and Oakley (1995) and Kamada, Okuno and Futagami(1998) have also investigated several factors affecting public investment.

By using data from

U.S. states from 1978 to 1988, Crain and Oakley (1995) investigate how political institutions
and processes affect public capital and public investment.

They find that institutions such as

term limits, citizen initiative, and budgeting procedures were significant determinants of statepublic capital stocks and public investment.
Kamada, Okuno and Futagami (1998) investigate the factors underlying publicdecisions on regional allocation of public investments.

They take for observation and analyze

ten regions of Japan for the time periods from 1955 to 1986, using the following as explanatory
variables: population growth rate, growth rate of per capita income, and regional income
inequality index.

They find that regional income inequality is an important factor in

determining public investment.

3. Whole Structure of Models

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In this study, our models consist of four simultaneous equations: (i) production
function, (ii) public capital formation function, (iii) national government’s public capital
investment function, (iv) prefectural government’s public investment function.

(1) Production Function
The production function defined here is specified as a function of private capital (Kit),
labor input (Lit) and public capital stock (Git) in prefecture i in year t.

In this study, we specify

the dependent variable as a productivity measure, which is defined by dividing output (Yit) bylabor input (Lit).

Therefore, the production function is described as follows:

Yit/Lit = f(Kit/Lit, Git, t).

(1)(2) Public Capital Formation Function
The public capital formation function expresses how the public capital stock isformatted.

This function is specified as a function of the previous year’s capital stock level(Gi,t-1), the national government’s public capital investment (IgCit) and the prefectural
government’s public capital investment (IgPit).

Therefore, the public capital formation function

is expressed as follows:
Git = g(Gi,t-1, IgCit, IgPit).

(2)(3) The National Government’s Public Capital Investment Function
The national government’s public capital investment function is explained by several
factors.

The first factor is the productive efficiency/equity reason for public capital investment.

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That is, the national government invests public capital in the prefecture which has regions moreproductive in private economic activity.

The national government tries to promote more

economic activity by investing more public capital.

Thus, if a prefecture has higher private

productivity (Yit/Lit), the prefecture tends to have more public capital investment.

Therefore, if

the coefficients of these variables have a positive sign, then the national government invests
more based on the productivity efficiency criteria. On the other hand, if the government cares
greatly about the equity reason in this measure, the sign of the coefficient could be negative.
The second factor is the capital stock efficiency/equity reason. The government’s
investment behavior is also affected by the stock level of public capital(Gi,t-1/POP,t-1).

If thegovernment cares greatly about efficiency in this measure, then a prefecture which has more
stock of public capital receives more investment.

On the other hand, if the national

government invests more public capital in order to reduce regional inequalities, then theprefectures with less public capital would receive more public investment.

In this case, therelationship between the national government’s investment and the stock of public capital could
be negative.
The third factor is intergovernmental relationships.

As each prefectural government

also invests public capital in itself, the prefectural government’s investment behavior could
affect the national government’s behavior.

Although strictly speaking, it is an empiricalquestion as to whether or not the national government’s investment is complementary,
substitutive or neutral in relation to the prefectural government’s investment, we assume that thecoefficient of this variable might be positive.

The main reason is that in many cases public

investment is done cooperatively by the national government and the prefectural government.

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Therefore, we include the prefectural government’s investment (IgPit).
The fourth factor is lobbying from industries related to public capital investment.
Because more investment in public capital increases total revenues and job opportunities for theindustries related to public capital, the industries have incentives to promote lobbying. The
percentage of the primary industry in number of employees (RAGit) and the percentage of theconstruction industry in number of employees (RCNit) can be considered as related to this factor.
Finally, there is the political factor, in which politicians could use to their advantage
the degree of public capital investment.

Clearly, politics is one important factor in attracting

public investment, with one well-known job of politicians being to promote big national
infrastructure construction projects in their home districts.
influential politicians tend to have more big projects.

Historically, regions withAmong several other factors related topolitics, one interesting question is whether or not political stability tends to have positive
relationship with public capital investment.

In order to test this factor, we include the ratio ofmajority vote to minority vote in the House of Representatives(RLSit).
Therefore, the national government’s public capital investment function is expressed
as follows.
IgCit =hN(Gi,t-1/POP,t-1 , Yit/Lit , IgPit , RAGit , RCNit, RLSit,)(3)(4) The Prefectural Government’s Public Investment Function
The prefectural government’s public capital investment function is generally
explained by the same kinds of factors as the national government’s capital investment function.
The first and the second factor are the efficiency/equity reason in both private productivity and9Mizutani & Tanaka

the capital stock level for public capital investment.

Private productivity (Yit/Lit) and the stockof public capital per capita (Gi,t-1/POPi,t-1) can be explained as related to these factors.

If thecoefficients of these variables have a positive sign, then the prefectural government invests
more based on the efficiency reason. On the other hand, if these have a negative sign, then theprefectural government invests more based on the equity reason.
The third factor is the intergovernmental relationship.

To test whether or not theprefectural government’s investment has a complementary, substitutive or neutral relation to thenational government’s investment, we include the national government’s investment (IgCit).
The fourth factor is lobbying from industries related to public capital formation.

Inthis function, the percentage of the primary industry in number of employees (RAGitt) and thepercentage of the construction industry in number of employees (RCNitt) are included as in the
National Government’s investment function.
The fifth factor is political.

In order to test this factor, we include the percentage of

votes for the Liberal Democratic Party in prefectural congress (PLDit).
The last is the fiscal factor of the prefectural government.
governments in Japan have been facing financial difficulties.
expenditures exceed tax revenues.

Most prefectural

In many cases, prefectural

We seek to test how the prefectural government’s public

capital investment would be affected by the fiscal situation.

Therefore, prefectural

government’s prefectural budget constraints affect public capital investment.

With regard to

this factor, national government grants for the construction of infrastructure (NTGit) and
Revenues-expenditures ratio in prefectural budget (BALit-1) are included.

Therefore, theprefectural government’s public capital investment function is expressed as follows.

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IgPit = hN(Gi,t-1/POP,t-1, Yitt/Lit , IgCit , RAGit , RCNit, PLDit, NTGit , BALit-1)(4)

4. Empirical Analysis
4.1 Empirical Models
The empirical models for these functions are generally specified as log-log form.
Although the original form of the production function is specified as the Cobb-Douglas form,
production function in this study is expressed as private productivity by dividing by labor (Lit).
These functions are specified as equation (5) to (8).

We estimate these four equations

simultaneously.
Production Function:ln(Yit/Lit) =αt + αK ln(Kit/Lit) + αG lnGi,t
where

(5)

Yit: Output of the private sector,
Lit: Labor input,
Kit: Private capital,
Git: Public capital,

Public Capital Formation Function:lnGit = βt + β1 lnGi,t-1 + β2 lnIgCit + β3 lnIgPit,
where

(6)

IgCit: National government’s public capital investment for each prefecture,
IgPit: Prefectural government’s public capital investment for each prefecture.

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National Government’s Public Capital Investment Function:lnIgCit = γt + γ1 ln(Gi,t-1/POPi,t-1)+ γ2 ln(Yit/Lit)+ γ3 lnIgPit + γ4 lnRAGit +γ5 lnRCNit+ γ6 lnRLSit,
where

(7)

Gi,t-1/POP,t-1: Public capital stock per population in the previous year,
RAGit: Percentage of employees in the first industry,
RCNit: Parcentage of employees in the construction industry,
RLSit: Ratio of majority vote to minority vote in the House ofRepresentatives.

Prefectural Government’s Public Capital Investment Function:lnIgPit = δi + δ1 ln(Gi,t-1/Li,t-1) + δ2 ln(Yit/Lit)+ δ3 lnIgCit + δ4 lnRAGit +δ5 lnRCNit+ δ6 lnPLDit + δ7 lnNTGit + δ8 lnBALit,
where

(8)

PLDit: Percentage of vote for the Liberal Democratic Party in the prefecturalcongress,
NTGit: National government grants for the construction of infrastructure,
BALit-1: Stand-alone revenues-expenditures ratio of prefectural budget.

Endogenous variables are private sector’s productivity(Yit/Lit), stock of public
capital(Git), national government’s public capital investment for each prefecture(IgCit),
prefectural government’s public capital investment for each prefecture(IgPit) and nine othervariables which are exogenous. Parameters αt , βt , γt , δt , t = 1, 2, 3, 4, 5 refer to fixed effects
for time periods.

The estimation method is the three stage least square (3SLS) method.

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expected sign for these variables is summarized in Table 1.
Table 1 Expected Sign of Coefficients for Regression Analysis
Productionln(Kit/Lit)

lnGi,tfunction++ln(Gi,t-1)

lnIgCitlnIgPit+++ln(Gi,t-1/POPi,t-1)ln(Yitt/Lit)

LnIgPitlnRAGitlnRCNitlnRLSit

?

?

?

+

+

?

ln(Gi,t-1/POPi,t-1)ln(Yitt/Lit)

lnIgCitlnRAGitlnRCNitlnPLDitlnNTGitlnBALi,t-1

?

?

?

+

+

?

+

+

Public capitalformation function
Public capital
investment (national)
Public capital
investment (prefecture)(Note): The notation “?” refers to the empirical questions in the regressions.

4.2 Hypothesis
In this study, we will investigate whether or not the following eight hypotheses are
held, the details of which will be explained.

Hypothesis 1: Public capital contributes to productivity.
As we mentioned earlier, previous studies do not have consistent results.

In thisstudy, we will investigate why the estimation results of public capital on productivity are quite
different among previous studies.

For example, some studies in the U.S., such as Munell(1990) , Merriman (1990) and Garcia-Mila and McGuire (1992), find that some components ofpublic capital such as Highway, Water Supply and Disposal, and Education contribute positively
to private production.

On the other hand, Evans and Karras (1994) show a different result:public capital, except for education, does not aid private production.

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Holtz-Eakin (1994) alsoMizutani & Tanaka

shows that public capital does not contribute private production.

In Japan, Mitsui et al. (1995)

show that core infrastructure of public capital makes a positive contribution but non-core
infrastructure is not significant.

Yamano and Ohkawara (2000) and Ida and Yoshida (1999)

show that public capital such as industry, living and environment are positive but public capitalsuch as education and land security have negative effects.
capital contributes to private productivity.

In summary, we assume that public

Therefore, αG > 0 (i.e.for lnGi,t ) holds.

Hypothesis 2: The government invests more public capital based on efficiency in private
productivity.
As we explained before, public capital investment is made according to the
productive efficiency/equity reason in private production.

If the government tries to promote

more economic activity, then the government invests more public capital.

In this case, theprefecture with higher productivity tends to have more public capital investment.

Therefore, if

the coefficients of these variables have a positive sign, then the national government invests
more based on productivity efficiency criteria.

We assume that both the national and theprefectural government’s behavior is based on the efficiency reason in private productivity.
Therefore, γ2 >0 (i.e. for ln(Yit/Lit))and δ2 >0 (i.e. for ln(Yit/Lit))hold.

Hypothesis 3: The government’s public capital investment is made to solve the regional
imbalance of stock of public capital.
As we explained previously, the government’s investment behavior is also affectedby the stock level of public capital.

If the national government invests more public capital in14

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order to reduce regional inequalities, then the prefectures with less public capital would receive
more public investment.

Because in general the government considers both efficiency andequity criteria, we assume that the government behaves based on the equity reason in thismeasure.

Therefore, in this case, the relationship between the government’s investment of theboth the national and the prefectural government and stock of public capital could be negative.
Therefore, γ1 <0 (i.e. for ln(Gi,t-1/POPi,t-1))and δ1 <0 (i.e. for ln(Gi,t-1/POPi,t-1))

Hypothesis 4: Public capital investment is complementary between national and prefectural
governments.
As for the intergovernmental relationship in investment behavior, there are threepossibilities: complementary, substitutive and neutral.

Although this is an empirical question,

we assume that the coefficient of this variable could be positive, because in many cases the
public investment is made cooperatively by the national government and prefectural
government.

Therefore, γ3 >0 (i.e. for lnIgPit ) and γ3 >0 (i.e. for lnIgPit ).

Hypothesis 5: Public capital investment is promoted by lobbying activities.
As for the lobbying factor, because more investment in public capital increases total
revenues and job opportunities for the industries related to public capital, industries have
incentives to promote lobbying.

The percentage of the primary industry in number of

employees and the percentage of the construction industry in number of employees can beconsidered as related to this factor.

Therefore, γ4 >0 (i.e. for lnRAGit), γ5 >0 (i.e. for lnRCNit)and δ4 >0 (i.e. for lnRAGit), δ5 >0 (i.e. for lnRCNit).

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Hypothesis 6: Public capital investment is promoted if the majority-minority difference
becomes smaller in a political election.
As explained above, politicians could use their influence to affect the degree of
public capital investment.

Among several factors in politics, one interesting question iswhether or not political stability tends to have a positive relationship with public capital
investment.

In order to test this factor, we include in the national government’s investment

function the ratio of majority vote to minority vote in the House of Representatives.

Therefore,

γ6 >0 (i.e. for lnRLSit).
On the other hand, in the case of the prefectural government’s investment function,
the percentage of vote for the Liberal Democratic Party in prefectural congress is assumed to bepositive.

Therefore, δ6 >0 (i.e. for lnPLDit ).

Hypothesis 7: The public capital investment of the prefectural government is halted if theprefectural government’s tax revenues are tight.
Most prefectural governments in Japan have been facing financial difficulties.
many cases, prefectural expenditures exceed tax revenues.

In

In order to test how a prefectural

government’s public capital investment would be affected by the fiscal situation, we assume that
prefectural government’s budget constraints have an effect on public capital investment.
stand-alone revenues become large, then the government invests more.

If theTherefore, there is apositive relationship between public investment and the revenues-expenditures ratio inprefectural budget.

Therefore, δ8 >0 (i.e. for lnBALit).

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Hypothesis 8: The public capital investment of the prefectural government is promoted by
grants from the national government.
Similar to the case for hypothesis 7, the more government grants a prefectural
government has for the construction of infrastructure, the more investment there will be by theprefectural government.

Therefore, δ7 >0 (i.e. for lnNTGit ).

4.3 Data
We use a panel data set of 46 prefectures for 5 time periods (1975, 1980, 1985, 1990,
1995). Although there are 47 prefectures in Japan, we use 46 prefectures, excluding Okinawa
because it is located about 700km southeast of Kyushu, one of Japan’s main islands.
Furthermore, as Okinawa remained under U.S. occupation until May of 1972 and many U.S.
military bases are located there, we would have been required to consider many unusual
political factors.

Therefore, we exclude Okinawa prefecture in this study.

As a result, thetotal sample size used here is 230 observations.

4.4 Variables
All variables used in this study are based on prefectures in Japan and they are defined
as follows.

The statistical information for the variables is summarized in Table 2.

First, theoutput of private sector (Yit) is the gross prefecture products of the private sector, obtained fromthe item “industry” in the statistical data sources, Annual Report on Prefectural Accounts(Kenmin Keizai Keisan Nenpo) and Report on Prefectural Accounts from 1955 to 1974 (Chouki

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Sokyu Suikei Kenmin Keizai Keisan Hokoku) issued by the Economic Planning Agency.
Table 2 Statistics of Used Variables
unit

Mean

Standard
deviation

Minimum

Maximum

Yit

Million yen

7,210,133

10,542,663

899,232

86,741390

Lit

Ten thousands man-hours

281,468

289,280

67,853

1,889,678

Kit

Million yen

11,374,169

15,594,515

828,060

141,558,711

Git

Million yen

3,099,763

2,966,615

460,516

28,809,711

Gi,t-1Million yen

2,231,690

2,225,680

282,190

22,106,394

POPi,t-1

person2,473,132

2,210,007

581,694

11,639,293

IgCit

Million yen

182,803

213,536

23,963

1,636,055

IgPit,

Million yen

280,228

203,10244,106

1,697,881

RAGit

%

13.54

7.45

0.37

34.79

RCNit

%

9.71

1.27

6.90

13.38

RLSit,

-

1.19

0.63

0.26

3.75

PLDit

%

48.96

9.58

25.40

70.30

NTGit

Million yen

322,967

197,371

99,994

1,526,205

BALi, t-1

-

0.29

0.15

0.10

0.78

Labor input (Lit) defined here is total working hours, calculated by multiplying thenumber of total employees in the private sector and the total annual working hours per person.
Private capital (Kit) is defined as the sum of the capital stock of ten private industries:(1)agriculture, forestry and fishing, (2)mining, (3)construction, (4)manufacturing, (5)public
utilities (electric power, gas, water supply and heat supply, (6)transport and telecommunications,(7)wholesale and retail, (8)banking and insurance, (9)real estate, and (10) service industry.
However, these data are available only for the years 1953 to 1963, compelling us to estimate thecapital stock of the private sector based on limited available data.

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Generally, the estimation of

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each prefecture’s capital stock is allocated from the national capital stock of the private sector
according to the weight of the prefecture.

The weight of the prefecture is obtained according

to the amount of investment.
Public capital (Git) used here is the sum of the public capital stock of four industries:(1)roads, (2)ports and airports, (3)agriculture (e.g. agriculture, forestry and fishing facilities),(4)land security (e.g. dams and banks).

Most data is obtained from the Infrastructure of Japan(Nihon no Shakai Shihon) by the Economic Planning Agency, and Annual Statistics ofConstruction of Public Works (Kokyo Koji Chakko Tokei Nendoho) by the Ministry ofConstruction.

Public capital in the previous time period (Gi,t-1) is the same as above.

Investment of the national government (IgCit) and investment of the prefectural
government (IgPit,) are the total amount of investment in four categories: (1) roads, (2) ports andairports, (3) agriculture, fishing and forestry, (4) land security.

The figures for theseinvestments are reported by distinguishing national government and prefectural government in
the Ministry of Construction’s The Annual Statistical Report on the Public Works Construction
Started (Kokyo Koji Chakko Tokei Nendoho).
As for lobbying, because there are no data on how often lobbying activities havebeen carried out, we use two kinds of variables as proxy variables: the percentage of employees
in the first industry (RAGit) and the percentage of employees in the construction industry (RCNit).
The first industry consists of agriculture, fishing and forestry.
study is related to the infrastructure of these industries.

Public capital as defined in our

Therefore, if the percentage of theseindustries becomes higher, we assume that pressure on policymakers becomes stronger to build
more infrastructure.

These variables are defined as the number of employees in each industry

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divided by the total number of employees in all industries.
As for the political factor, two variables are used: (1) the ratio of majority vote tominority vote in the House of Representatives (RLSit,) and (2) the percentage of votes for theleading party (Liberal Democratic Party) in the prefectural congress (PLDit).

First, the ratio ofmajority vote to minority vote is used for the investment of the national government.
of significantly more than one indicates a stable political situation.
one, the political situation becomes unstable.

A ratio

As the ratio approaches

For example, in the case of political stability inwhich the majority(minority) vote is 70%(30%), then the ratio is about 2.33.

On the other

hand, in an unstable political situation in which the majority (Minority) vote is 50.1%(49.9%),
the ratio becomes about 1.00.

Thus, this variable represents political stability.

The

percentage of votes for the leading party in the prefectural congress is used for the investment of
the prefectural government.

In general, in many cases, especially prefectures with large

metropolitan areas, the Liberal Democratic Party is the majority but in prefectures without large
metropolitan areas it is not.

Furthermore, in the prefectural congress, we can see many cases

where the minority party in the House of Representatives joins the majority.

However, it isoften observed that the leading party in the House has had a strong political influence on
investment decisions by prefectural governments. Therefore, we define this variable for theinvestment of the prefectural government.
Finally, as for the fiscal factor, two variables such as national government grants forthe construction of infrastructure (NTGit) and the stand-alone revenues-expenditures ratio ofprefectural budget (BALit-1) are defined here.

First, the figures on national grants to prefectural

governments are obtained from the Ministry of Home Affairs’ Annual Statistics on Local

20

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Government Finance (Chiho Zaisei Tokei Nenpo).

The stand-alone revenues-expenditures

ratio of a prefectural budget is how much of its own revenue the prefectural government has.
Most prefectural governments, except for large prefectures such as Tokyo, have been getting asignificant amount of money, such as the distribution of local allocation tax from the national
government.

Prefectural officials sometimes claim that their own revenues, such as local tax

and user charges, comprise only 30% of total revenues.

In this study, as we would like toknow the effect of prefectural budget constraints on the investment of public capital, we define
the stand-alone revenues-expenditures ratio by dividing total prefecture revenues less the
distribution of local allocation tax (i.e. local tax revenues and user charges) by the total
expenditures of the prefectural budgets.

4.5 Results
Selected estimation results are summarized in Table 3.

Although most cases are

estimation results of the 3SLS for the four simultaneous equations, we also present the result of
the fixed effect model by the estimation of equation-by-equation.

Overall results seem to bereasonable: the fit of the four equations is pretty high with R2 ranging from 0.664 to 0.999.
From the estimation results, the following conclusions can be drawn.
First, the coefficient of public capital stock (Git) in the production function is stablewith respect to the different specifications, even if the estimate for the coefficient of public
capital does not vary much between single equation and simultaneous equation.

The

coefficient of public capital in the production function is about 0.05 to 0.06 with statisticalsignificance.

Therefore, Hypothesis 1, which predicts that public capital contributes to21

Mizutani & Tanaka

productivity, holds.

However, the value of the coefficient seems a bit smaller than that of theequivalent public capital in the previous studies.

For example, the coefficients of public

capital in the previous studies are 0.240(core-infrastructure) in Aschauer(1989), 0.060(highway)
in Munnell(1990), 0.044-0.045(highway) in Garcia-Mila and McGuire(1992), 0.172(core-infrastructure) in Mitsui et al.(1995), 0.152-0.347 (industry) in Ida and Yoshida(1999).
Second, as for the relationship between public investment(IgCit, IgPit) and private
productivity(Yit/Lit), the results are different between the central government and the prefectural
government.

The coefficient of private productivity in the public investment function of thenational government is about 0.76 to 1.14.

On the other hand, the coefficient of private

productivity in the public investment function of the prefectural government shows the negative
sign: about –0.854 to –0.965 in the simultaneous model.

These results show that the national

government invests more based on the efficiency reason but that the prefectural government
invests more based on the equity reason.
The relationship between public investment(IgCit, IgPit) and public capital per
capita(Gi,t-1/POPi,t-1) is the opposite of results regarding private productivity.

The coefficient ofpublic capital per capita in the national government’s public investment function shows thenegative sign, which varies about –0.367 to –0.528.

On the other hand, in the case of theprefectural government’s investment function, the public capital per capita shows the positive
sign, ranging from about 0.282 to 0.392.

Compared with a variable which shows economic

flow (i.e. private productivity), the contribution of public capital to public investment is notlarge.

As for this variable, the national government invests more based on the equity reason

but the prefectural government invests more based on the efficiency reason.

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Fourth, the complementarity of public capital investment (IgCit, IgPit)between thenational and the prefectural government could hold because the coefficients of public
investment of both the national and the prefectural government show the positive sign.
However, the degree of the effects varies: the prefectural government’s investment effect on thenational government’s investment is much larger. This result coordinates with the reality of
public investment because the national government’s big projects often coordinate with the local
government’s.
As for the lobbying factor, we were unable to get consistent results.

In the national

government’s public investment function, the coefficient of the percentage of employees in theconstruction industry (RCNit) shows the positive sign but the percentage of employees in thefirst industry(RAGit) shows negative.

On the other hand, in the prefectural government’s

public investment function, only the percentage of employees in the first industry is significant
but the effect of that variable is not large.

These results show that the lobbying factor might beeffective in stimulating public investment by the national government.
As for the political factor, first the ratio of majority vote to minority vote in theHouse of Representatives does not show a clear effect on the national government’s investment
function. According to the results of simultaneous equations, this factor is not significant.

Onthe other hand, in the case of the prefectural government’s investment function, the percentage
of votes for the Liberal Democratic Party in prefectural congress shows the positive sign,varying from 0.166 to 0.181.

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Table 3 Estimation Results of Regressions
Function

Variables

Exp. Equation-bysign -equation

Production
functionln(Kit/Lit)+

lnGi,t+ln(Yit/Lit)

adj.R2Public capitalformation
FunctionlnGi,tlnGi,t-1+

lnIgCit+lnIgPit+adj.R2NationallnIgPitgovernment’s
investment ln(Gi,t-1/POPi,t-1)functionln(Yit/Lit)
lnIgCit+/+/+/-

lnRAGit+lnRCNit+lnRLSit+/-adj.R2Prefectural
lnIgCitgovernment’s
investment ln(Gi,t-1/POPi,t-1)functionln(Yit/Lit)
lnIgPit+/+/+/-

lnRAGit+lnRCNit+lnPLDit+/-lnNTGit+lnBALit+adj.R2

3SLS

3SLS

3SLS

3SLS

Model-PR1

Model-PR2

Model-PR3

Model-PR4

Model-PR5

0.721(0.047)0.050(0.016)
0.798

0.712
(0.046)0.058(0.017)
0.798

0.710
(0.046)0.052(0.016)
0.798

0.716
(0.046)0.061(0.017)
0.798

0.714
(0.046)0.052(0.016)0.798

Model-PC1

Model-PC2

Model-PC3

Model-PC4

Model-PC5

0.695(0.008)0.112(0.004)0.191(0.006)
0.999

0.630
(0.021)0.149(0.012)0.216(0.011)
0.999

0.639
(0.022)0.149(0.012)0.207(0.011)
0.998

0.612
(0.027)0.155(0.015)0.228(0.013)
0.998

0.614
(0.025)0.159(0.014)0.223(0.013)0.998

Model-NI1 Model-NI2 Model-NI3 Model-NI4 Model-NI5
1.013
1.043
1.177
1.187
1.174
(0.063)(0.066)(0.064)(0.064)(0.067)-0.316-0.367-0.452-0.378-0.528(0.101)(0.100)(0.097)(0.095)(0.099)
0.692
0.761
1.032
1.144
1.037
(0.272)(0.327)(0.255)(0.263)(0.260)-0.116-0.151(0.067)(0.069)
1.072
1.243
0.667
1.130
(0.320)(0.308)(0.245)(0.308)-0.155-0.032
0.005
0.002
0.040
(0.074)(0.066)(0.055)(0.046)(0.054)
0.701
0.696
0.679
0.664
0.677
Model-PI1 Model-PI2 Model-PI3 Model-PI4 Model-PI5
0.128
0.289
0.436
0.618
0.498
(0.027)(0.214)(0.039)(0.109)(0.044)
0.255
0.282
0.282
0.283
0.392
(0.046)(0.046)(0.043)(0.050)(0.044)-0.389-0.854-0.878-0.965-0.897(0.154)(0.259)(0.272)(0.249)(0.274)
0.131
0.087
0.041
(0.030)(0.034)(0.025)0.008-0.127-0.446(0.141)(0.290)(0.163)
0.196
0.175
0.181
0.166
(0.074)(0.103)(0.059)(0.068)
0.902
0.709
0.499
0.284
0.419
(0.044)(0.228)(0.053)(0.131)(0.056)
0.486
0.467
0.333
0.172
0.234
(0.075)(0.223)(0.100)(0.096)(0.115)
0.906
0.885
0.840
0.743
0.805

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Mizutani & Tanaka

Finally, as for the relationship between public capital investment and the financial
difficulties, according to the regression results the revenues-expenditures ratio shows a positive
relationship, varying from 0.172 to 0.467.

And the availability of the national government

grants for the construction of infrastructure further boosts the prefectural government’s
investment.

5. Concluding Remarks
The main goals of our study is to clarify two important issues: whether or not public
infrastructure contributes to production in the private sector, and whether or not political
economy factors such as political situations, lobbying factors and the availability of national
grants for investment affect the allocation of public infrastructure investment.

If the political

economy factors indeed affect allocation of public capital investment, what kinds of factors are
the most deterministic?

In order to investigate these questions, we estimate simultaneous

equations and evaluate them.

We obtain the following empirical results.

(1) The coefficient of public capital stock (Gi,t) in the production function is stable with respect
to the different specifications.

Therefore, the hypothesis that public capital contributes to

productivity, could hold.
(2) As for the relationship between public investment(IgCit, IgPit) and private productivity(Yit/Lit),
the results are different between the national government and the prefectural government.
Empirical results show that the national government might invest more based on the efficiency
reason but the prefectural government might invest more based on the equity reason.

25

Mizutani & Tanaka(3) The relationship between public investment(IgCit, IgPit) and public capital per
capita(Gi,t-1/POPi,t-1) is the opposite to the case of private productivity.

The national

government invests more based on the equity reason but the prefectural government invests
more based on the efficiency reason.
(4) The complementarity of public capital investment (IgCit, IgPit) between the national and theprefectural government could hold.

However, the degree of the effects is different: theprefectural government’s investment effect on the national government’s investment is muchlarger.
(5) As for the lobbying factor, we could not get consistent results.

Empirical results show thatthe lobbying factor regarding the construction industry might be effective in stimulating
investment by the national government.
(6) We cannot find a clear political factor in the national government’s public investment
function but in the case of the prefectural government’s investment function, the factor has apositive effect on investment.
(7) The availability of national government grants for the construction of infrastructure further
boosts investments by prefectural governments.
[2005.9.22 725]

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