EFFECT OF PUBLIC INVESTMENT ON THE REGIONAL ECONOMIES IN POSTWAR JAPAN

Abstract

This paper examines the effect of public investment on the regional economies of postwar Japan. It evaluates the effects of efficiency‐verses‐equity‐oriented allocation policies by estimating the aggregate regional production function and calculating the marginal productivity of public capital for each region, using panel data covering the 47 prefectures over the period from 1955 to 2000. The empirical results show that public capital investment has alternated between an allocation policy based on efficiency and one that is based on equity, and, in fact, such investment was used as a policy tool for adjusting income distribution and accelerating economic growth. Numerical simulations are used to analyze the trade‐offs between economic efficiency and inter‐prefectural equity. The results indicate that in the case of income‐elastic labor mobility, an efficiency‐oriented allocation policy leads to larger aggregate gross domestic product by promoting both growth and equity simultaneously.