Augmented Solow Model with Mincerian Education and Transport Infrastructure Externalities

According to Crescezni and Rodríguez-Pose (2008) backward European states and regions should follow balanced strategies in which infrastructure development is coordinated with policies aimed at developing human capital and the innovative potential of regions. In order to assess their postulates we extend the analysis of Carstensen et al. (2009) further augmenting the neoclassical Solow Model to incorporate Mincerian schooling externalities and infrastructure externalities in a single theoretical framework. Infrastructure is introduced into the model in a manner similar to exogenous Hicks-neutral technological change, raising the overall efficiency of an economy. The theoretical model has been empirically tested for a panel of European economies in the period 1999–2010. Econometric estimates for a balanced panel data model bring interesting results. The overall fit of the model is considerable. In accordance with our expectations, the macroeconomic returns to human capital accumulation and infrastru cture are positive and statistically significant for a full sample of countries. Externalities are stronger for CEE transition economies than for non-CEE countries. The infrastructure externality is positive and statistically significant for CEE states only when we control for the level of openness of an economy. Results obtained are robust when taken with the modifications of the baseline empirical model.