The “Public Capital Hypothesis” : The Case of Germany

According to the "public capital hypothesis" public investment crowds in private investment by increasing the rate of return to private capital. The present paper uses an extended cost function with public capital included as an unpaid fixed factor of production to ex- amine the impact public capital has on the private economy. Using a panel of four highly aggregated sectors of the West German Economy, it is shown, that the provision of public capital raises the demand for private capital, as suggested by the public capital hypothesis. In addition, it is shown that public infrastructure capital contributes to the productivity of the private economy.