Aggregate Production Functions and the Measurement of Infrastructure Productivity: A Reassessment

This paper revisits the conundrum surrounding the measurement of the impact of public infrastructure spending in the light of the aggregation literature (Fisher, 1969; 1993). It shows why estimations of aggregate production functions (APFs) augmented with a proxy for public expenditures do not yield an estimate that can be interpreted as the productivity of public infrastructure. The reason is that underlying all APFs is the accounting identity that relates value added to the wage bill plus overall profits. This identity can be rewritten as a mathematical form that resembles a production function. Therefore, the estimated coefficients cannot be taken to be the structural parameters of a production function. The paper also offers a brief discussion of the productivity puzzle.