Political economy of infrastructure investment allocation: evidence from a panel of large German cities

This paper proposes a simultaneous-equation approach to the estimation of the contribution of infrastructure accumulation to private production. A political-economy model for the allocation of public infrastructure investment grants is formulated. Our empirical findings, using a panel of large German cities for the years 1980, 1986, and 1988, suggest that cities ruled by a council sharing the State (.Bundesland.) government’s current political affiliation were particularly successful in attracting infrastructure investment grants. With regard to the contribution of infrastructure accumulation to growth, we find that public capital is a significant factor for private production. Moreover, at least for the sample studied, we find that simultaneity between output and public capital is weak; thus, feedback effects from output to infrastructure are negligible.