The Effects of Economic Performance on Infrastructure Spending at the State and Local Levels

Abstract Economic development and growth may induce infrastructure investment and service provision by the public sector. This article investigates to what degree economic performance affects infrastructure spending at the state and local levels. For further elaboration, it examines the differential impacts of economic performance on state and local spending on different types of infrastructure. For that purpose, infrastructure is classified into two types: knowledge infrastructure and physical infrastructure. Methodologically, it uses the time-series cross-sectional (TSCS) data from 1977 to 2000 in 50 states of the USA. To correct the complex error terms in TSCS data, it uses the ordinary least square estimation using the Prais-Winsten procedure and panel-corrected standard errors. Some endogeneity issues are also corrected. Research finds that economic development and growth contributes to the increasing infrastructure spending on a per capita basis by state and local governments; however, its magnitude is not large. When infrastructure spending is disaggregated, economic performance also contributes to the increasing state and local spending on both knowledge and physical infrastructures. In particular, the magnitude of the positive effects on physical infrastructure spending is approximately two times as large as that on knowledge infrastructure spending. However, economic performance has no significant effects on the proportion of infrastructure spending out of the total state and local spending, regardless of whether infrastructure is aggregated or disaggregated. In short, there are level effects of economic performance, but there are no compositional effects. This finding implies that state and local governments increase infrastructure investment and its service provision in responding to the economic growth; yet, they do not consider it as a top priority in comparison with other types of functional areas.