PUBLIC INFRASTRUCTURE AND EXTERNALITIES IN U.S. MANUFACTURING: EVIDENCE FROM THE PRICE-AUGMENTING AIM COST FUNCTION

Abstract

In this paper, we propose a price-augmenting asymptotically ideal model (AIM) cost function to investigate the effects of public infrastructure on the performance of the U.S. manufacturing industry, using KLEMS data over the period from 1953 to 2001. In doing so, we make a distinction between the productivity effect and the production factor effect of public infrastructure. This distinction allows us to focus on the more interesting productivity effect by incorporating public infrastructure into the AIM cost function through the efficiency index. Moreover, we specify the growth rate of the efficiency index as a Box–Cox function of public infrastructure and a time trend, a proxy for other technology. The excellent flexibility of our price-augmenting AIM cost function offers many insights regarding the effects of infrastructure on the U.S. manufacturing sector.