Public goods production and private strongsectorstrong productivity.pdfVIP

Public goods production and private sector productivity Eva Benedicte Danielsen Norman The Norwegian School of Economics and Business Administration, N-5045 Bergen, Norway and Institute for Research in Economics and Business Administration, N-5045 Bergen, Norway Abstract: In this paper we study how the use of resources in the public sector affects industrial structure, the size and the productivity in knowledge-intensive clusters in local communities. We also discuss how these considerations should be implemented in cost- benefit assessments of local public goods supply. The topics are studied in a setting where there are gains from agglomeration in knowledge-intensive industries, creating clusters of firms in such industries. We find that the primary effect is a Rybczynski effect: If production in the public sector is knowledge-intensive, the size of the knowledge-intensive private industry declines when the public sector increases its production. If, on the other hand, public sector production uses relatively much unskilled labour, increased public goods production leads to higher production in the knowledge-intensive private industries. Private sector productivity is affected in the same way as production: If production in the knowledge- intensive industry increases, so does its productivity due to agglomeration effects; leading to higher wages for highly skilled labour. JEL classification: D24, H7, R3, R5 Keywords: Agglomeration, external economies of scale, firm location, production cost, regional government policies 1 1. Introduction This p