Reassessing the Social Returns to Equipment Investment
24 Pages Posted: 18 Jul 2007 Last revised: 20 Jul 2010
Date Written: July 1993
The recent literature on the sources of economic growth has challenged the traditional growth accounting of the Solow model, which assigned a relatively limited role to capital deepening. As part of this literature, De Long and Summers have argued in two papers that the link between equipment investment and economic growth across countries is stronger than can be generated by the Solow model. Accordingly, they conclude that such investment yields important external benefits. However, their analysis suffers from two shortcomings. First, De Long and Summers have not conducted any formal statistical tests of the Solow model. Second, even their informal rejection of the model fails to survive reasonable tests of robustness. We formally test the predictions of the Solow model using De Long and Summers' data. Our results cast doubt on the existence of externalities to equipment investment. In particular, we find that the empirical link between investment and growth in the OECD countries is fully consistent with the Solow model. Moreover, for De Long and Summers' full sample, the evidence of excess returns to equipment investment is tenuous.
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