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The Marginal Product of Government Capital

Aart Kraay
Economist, Development Research Group, World Bank
Maya Eden
Economist, Development Research Group, World Bank
Andrew Berg
Assistant Director, Research Department, International Monetary Fund
Justin Sandefur
Research Fellow, Center for Global Development
Measuring the returns to government capital is difficult because the services of government capital typically are provided free of charge. This implies that, unlike returns to private factors of production, returns to government capital cannot be inferred from observed factor payments.
In their new paper, Aart Kraay and Maya Eden develop an accounting approach to measuring the returns to government capital, as a function of the unobserved distribution of the product of government capital between private factors of production. Under fairly mild assumptions, they obtain lower and upper bounds on the return to government capital. They implement this approach in a large cross-section of developed and developing countries, and find that the lower bound on the return to government capital is on average quite high, around 27 percent per year, and varies widely across countries. Then they compare these returns to estimates of the marginal product of private capital and the marginal cost of public funds to understand the implications for the desirability of public investment.
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