Invest one – get two extra: Public investment crowds in private investment

Abstract

This study uses panel econometric methods to explore the relationship between public and private investment in a sample of 34 industrialized economies of the OECD over the period between 1995 and 2019. It aims to establish whether public investment crowds in private investment, to what extent, and in which public policy areas the effect is stronger. The estimation results demonstrate that in the medium to long-term, extra public investment crowds in private investment as the latter adjusts to bring the stock of private capital closer to its long-term cointegrating relationship with public capital. The long-run public investment multiplier is around 2, which means that each additional dollar of public investment eventually attracts approximately two dollars of private investment. Public investment in economic affairs and infrastructure needed to improve human capital is the most effective in attracting private investment.