“This paper develops a framework for making decisions on the type of infrastructure to
build and where to build. The basic intuition is that by deriving the marginal physical products of installed infrastructure, we can prioritize infrastructure investment of the same type among regions, and of different types within a region. The methodology is to estimate a panel of regional production functions that allows the intercepts to capture individual differences (“the fixed effects”) but uses interactive dummies to capture the effect of individual differences on marginal productivity. This framework could be a useful tool for the management of public capital in an economy subject to fiscal federalism, particularly where the interaction of interest group struggles
and the politics of centre-state grants may involve difficult trade-offs.”
