"Crowding In"And the Returns to Government Investment in Low-Income Countries

35 Pages Posted: 20 Apr 2016

See all articles by Maya Eden

Maya Eden

World Bank - Development Research Group (DECRG)

Aart Kraay

World Bank - Development Research Group (DECRG)

Date Written: February 1, 2014

Abstract

This paper estimates the effect of government investment on private investment in a sample of 39 low-income countries. Fluctuations in a predetermined component of disbursements on loans from official creditors to developing country governments are used as an instrument for fluctuations in public investment. The analysis finds evidence of "crowding in" : an extra dollar of government investment raises private investment by roughly two dollars, and output by 1.5 dollars. To understand the implications for the return to public investment, a CES production function with public and private capital as inputs is calibrated. For most countries in the sample, the returns to government investment exceed the world interest rate. However, for some countries that already have high government investment rates, the return to further investment is below the world interest rate.

Keywords: Debt Markets, Investment and Investment Climate, Access to Finance, Non Bank Financial Institutions, Emerging Markets

Suggested Citation

Eden, Maya and Kraay, Aart, "Crowding In"And the Returns to Government Investment in Low-Income Countries (February 1, 2014). World Bank Policy Research Working Paper No. 6781. Available at SSRN: https://ssrn.com/abstract=2398151

Maya Eden (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Aart Kraay

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-473-5756 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/akraay

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