Empir Econ (2013) 45:193216

DOI 10.1007/s00181-012-0615-z

Public and private capital productivity in Russia:

a non-parametric investigation

Mika Kortelainen Simo Leppnen

Received: 14 February 2011 / Accepted: 13 May 2012 / Published online: 4 August 2012
Springer-Verlag 2012

Abstract The productivity of public capital has been very popular research topic for
US and other OECD countries, while studies using data from transitional countries are
almost non-existent. In this paper, we analyze the productivity of public and private
capital in Russia with parametric and non-parametric regression methods utilizing a
unique regional level panel data from 2003 to 2007. More specifically, we assess pub-
lic capitals spillover effects, i.e., the productivity of public capital on private output,
as well as the productivity of different capital ownership types on total output. We
find that public capital has a clear positive effect on private output. However, our
estimates and test statistics show that parametric methods are not able to grasp vast
non-linearities and heterogeneity present among Russian regions, while the non-para-
metric approach can capture these important features of the data better. Furthermore,
we find that multicollinearity is an important methodological problem which should
be accounted for in analysis concerning capital data. Our results also suggest that the
impact of public capital in Russia is heterogeneous in the sense that for some regions
its contribution to private output is insignificant or even negative while it has a con-
siderable positive role for most regions. Concerning the capital elasticities of total
output, we find that public capital is less productive than private capital and roughly
as productive as joint private-public capital.

M. Kortelainen (B)
Government Institute for Economic Research, P.O. Box 1279, 00101 Helsinki, Finland
e-mail: mika.kortelainen@vatt.fi

M. Kortelainen
Economics, School of Social Sciences, University of Manchester, Oxford Road,
Manchester M13 9PL, UK

S. Leppnen
Center for Markets in Transition (CEMAT), Aalto University School of Economics,
P.O. Box 21230, 00076 Aalto, Finland
e-mail: simo.leppanen@aalto.fi

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Keywords Infrastructure Kernel smoothing Productivity Public capital stock

Russian regions

JEL Classification C14 H54 R53 P2

1 Introduction

The productivity of public capital is a fundamental question concerning the economic

order of a society. Although theoretically debatable, in the real world public sector has
major and persistent role. While many studies have shown public ownership in firms
to be less efficient than private, it would be yet surprising to find out public capital to
be generally non-productive for the private production. Since the influential papers of
Aschauer (1989, 1990) showing that public capital had large and significant positive
effect on private output at the national level in the US, and suggesting that the US
productivity slowdown in 1970s and 1980s might be due to underinvestment of public
capital, productivity debate has been going on whether his results hold up. Munnell
(1990a,b) and others obtained similar results to Aschauers. As more sophisticated
econometric techniques were utilized in productivity analysis (e.g., state and time
effects were included), it started more and more to seem that the elasticity/marginal
effect of the public capital input on private output is actually very small and/or non-
significant. Some studies that included both time and state effects such as Evans and
Karras (1994), Holtz-Eakin (1994), and Garcia-Mila et al. (1996) even found nega-
tive elasticities for public capital showing contradictory evidence to productive public
capital. Recent meta-analysis from dozens of studies compiled by Bom and Lighthart
(2011) on the other hand concludes that the public capital elasticity on private output
is indeed positive (0.08) but clearly smaller than the early estimates.
Several different methodological approaches have been employed to study public
capital productivity as well as to explain the non-significant results found in earlier
studies. Although no unique explanations for the non-significant estimates have been
provided, two promising explanations have been given. Firstly, Ai and Cassou (1997)
argue that multicollinearity between the input variables and the state and time effects
could explain the weak effect of public capital obtained in studies which use the fixed
effect method. More recently, Henderson and Kumbhakar (2006) argue that the main
culprit is model misspecification, i.e., that the standard parametric approaches are
not able to detect non-linearities and heterogeneous effects that public capital may
have. To address these issues, Henderson and Kumbhakar (ibid., HK henceforth) used
recently developed non-parametric techniques that allow heterogeneous impacts for
public capital and other inputs. In contrast to parametric fixed effect model, HK find
the return to public capital to be positive and significantly different from zero in
non-parametric model with two different US data sets.
So far the vast literature on public capital productivity has concentrated mainly on
country and regional level data for OECD countries. For example, in their compre-
hensive meta-analysis Bom and Lighthart (2011) consider 76 studies none of which
concerns transition country data. Rare exceptions from OECD data are studies by
Ram (1996) and Dessus and Herrera (2000) which use developing country data but

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Public and private capital productivity in Russia 195

utilize capital investments data instead of a capital stock measure directly. Taking into
account the public capital productivity results for the OECD countries, it is interesting
from a political economy perspective to analyze the situation in a socioeconomic set-
ting of completely different background. Such a setting is provided by the transition
countries. Only some twenty years ago virtually all capital under the Soviet regime
was state owned. It would be easy to condemn the public ownership of productive
assets with the bad example of Soviet Union. However, it was not the public owner-
ship per se which created the stagnation of the Soviet Union in the late 1980s. It has
been argued that behind the economic problems were mainly informational problems,
incentive problems and badly defined property rights [see, e.g., Sutela (2003)]. After
the dissolution of Soviet Union a rapid privatization wave shifted most of the capital
under private ownership creating more typical setting where most of manufacturing
capital is under private ownership and most of infrastructure is public.
In this paper, we, to our knowledge for the first time, estimate the productivity
of public capital on private output in Russia and get first estimates for any transition
country with a direct measure of capital stock. Probably the main reason for this lack of
transition data analysis is due to short time (some 20 years) since the breakdown of the
socialist system in these countries. Our unique data set compiled by the Russian Fed-
eral State Statistical Service (Rosstat) enables us to tackle the data availability problem
by utilizing regional level panel data. In addition to the political economy motivation,
Russian data provides methodological interest as well. First, Russian data enables us
to analyze both multicollinearity and heterogeneity issues described above. Secondly,
despite major institutional transition, the Russian economy is still very different from
the US due to the more intertwined relationship between the private and public sector
through, e.g., enterprises of joint ownership. Thus, obtaining similar results as HK
with a country of such different economic and institutional setting would provide
support for the methodological roots of the seemingly non-productive public capital.
As a specific feature for Russia we will also complement the traditional approach by
comparing the productivity of different ownership types of capital on total output. This
includes analysis of joint publicprivate capital which has a major role in Russia and
thus provides interesting additional insight on transition country capital productivity.
Our main results are that the usual inclusion of time and region effects, especially
the latter, create a major multicollinearity problem which makes robust parametric
and non-parametric estimation infeasible. However, we show that by introducing a
restriction on region effects, we can alleviate the problem considerably. Furthermore,
our estimates and test statistics also show that the used parametric methods are not
able to grasp vast non-linearities and heterogeneity present among Russian regions. To
tackle these issues, we follow HK and apply non-parametric approach that allows us
to capture heterogeneous impacts that inputs seem to have on regional private and total
output. With regard to private output, we find return to public capital to be positive but
clearly smaller in magnitude than return for private capital. Furthermore, the results
show that there is a lot of heterogeneity in the impacts of public capital in the sense
that for some regions its contribution on private output is insignificant or even nega-
tive while it has a considerable positive role for most regions. Concerning the capital
elasticities of total output, we find that public capital is less productive than private
capital and roughly as productive as joint privatepublic capital.

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196 M. Kortelainen, S. Leppnen

The remainder of the paper is organized as follows. Section 2 reviews the rele-
vant literature on the public and private capital productivity and Sect. 3 discusses
our data generation and capital in Russia in general. Section 4 presents econometric
methods to be used in the paper, while Sect. 5 gives the results of the parametric and
non-parametric approaches. Finally, Sect. 6 concludes.

2 Public capital productivity

2.1 Methodological issues

As many earlier and more recent papers (e.g., Gramlich 1994; Bom and Lighthart
2011) survey and discuss rather comprehensively the relevant literature, we suffice
here to focus mainly on two almost untouched methodological issues that are potential
causes behind the weak productivity results of public capital in the earlier literature.
Early papers (Aschauer 1989, 1990; Munnell 1990a,b) obtaining positive public cap-
ital elasticites in the US were criticized of, e.g., ignoring time and state effects and
non-stationarity (e.g., Holtz-Eakin 1994; Evans and Karras 1994; Tatom 1991). Con-
sequent estimates introduced time and state effects into the models producing mostly
non-significant estimates for public capital and resulted in conclusions of non-produc-
tivity. During the two decades since the Aschauer papers various approaches have been
applied but the contradiction between theoretical implications (return rates form public
and private should theoretically be the same or at least not very different) and empiri-
cal evidence of unproductive public capital have remained unsatisfactorily explained.
Henderson and Kumbhakar (2006) state that majority of empirical evidence supports
the view that the marginal return from public capital is not significantly different from
zero while Bom and Lighthart (ibid.) conclude in their meta-analysis that the return
on public capital is in fact positive and significant, but of a low value (0.08).
Two major methodological factors have been suggested to be behind the weak
productivity estimates of public capital found in a number of studies. Firstly, almost
unnoticed, Ai and Cassou (1997) argue that multicollinearity between the input vari-
ables and the state and time dummies could explain the odd results of the earlier capital
productivity literature, as multicollinearity can cause large swings in estimates after
small data changes, produce very high standard errors and implausible sign or magni-
tude for the coefficients. In their analysis Ai and Cassou (ibid.) employ US state level
data used in Munnell (1990a,b) and Evans and Karras (1994) as well as another data
from Holtz-Eakin (1994) and show that multicollinearity can be a serious problem for
both data sets when estimated model includes both state and time dummies. Thus, the
insignificant estimates for public capital obtained by Evans and Karras (1994) and
Holtz-Eakin (1994) with fixed effect method can actually result from very high cor-
relation between state dummies and inputs. While the evidence for multicollinearity
problem with the US data seems strong, Ai and Cassou do not provide explanation for
why private capital seems consistently productive in the literature even though it suf-
fers from the same multicollinearity with the state effects. However, an examination of
capital data reveals that in general private capital series has much more variation over
time (i.e., within variation) for a cross-sectional unit than public capital has which is

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intuitive considering the different roles they typically have in a society. As fixed effects
utilizes only within variation, it might be therefore difficult to identify the effect of
public capital on production. We think that this finding is of high importance for the
public capital productivity literature and should be generally checked in applications
involving time and regional effects (or dummies). In fact, with regard to our Russian
data, the presence of multicollinearity and low within variation for public capital series
seems evident as well (see Sect. 5.1).
More recently, Henderson and Kumbhakar (2006) have provided another promising
explanation for seemingly low or non-productivity of public capital. They argue that
the weak results concerning public capital could be due to the rather standard use of the
CobbDouglas production function approach which assumes the same elasticities for
each state and year and is not able to detect the possible non-linear and heterogeneous
effects of the independent variables. Using the generalized kernel regression technique
that allows one to smooth both continuous as well as discrete regressors (state and
time effects), they find convincing evidence that the elasticity of public capital in the
US is indeed positive (mean 0.11 or 0.23 depending on data set) and significant. More-
over, their estimates for private capital are significant and of reasonable size (quite
consistently also in the older literature) with both non-parametric and more standard
parametric methods, while for public capital parametric and non-parametric results
differ considerably. One intuitive explanation for this is that non-linearities could well
be a more likely property of public capital which has the role of complementary cap-
ital not to mention its various spillover effects (see, e.g., Duggal et al. (1999), for a
theoretical justification of non-linearities).
One conclusion from combining the Henderson and Kumbhakar (HK) and Ai and
Cassou (ibid.) results is that it would seem that the multicollinearity is only a problem
for linear models and does not extend to non-linear or flexible models. However, first of
all it is very important to note that flexible parametric functional forms such as translog,
which allow some non-linearity, are actually much more sensitive to multicollinearity
problem than the linear or Cobb-Douglas functional form. In fact, multicollinearity
is one of the main reasons why almost all the studies in this literature have used
CobbDouglas and only a few papers (e.g., Nadiri and Mamuneas 1994; Morrison
and Schwartz 1996a,b; Cohen and Morrison Paul 2004) have used flexible functional
forms.1
The main reason for the multicollinearity problem in flexible parametric models
is the fact that one typically has to include a large number of additional variables
(squares and interaction terms of regressors) in the regression model that can corre-
late strongly with existing variables. On the contrary, most common non-parametric
regression methods such as kernel or local linear regression do not require any more
variables than are needed in the CobbDouglas model, and are in this sense less sen-
sitive to the multicollinearity problem. However, these methods achieve flexibility by
estimating regression function locally, which means that for single observation fitted
value and marginal effects are estimated using only part of the observations, so-called

1 It is worth noting that almost all of the previous studies using flexible parametric specifications estimate
cost function instead of production function. Multicollinearity seems to be a less serious problem in cost
function than in production function estimation.

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198 M. Kortelainen, S. Leppnen

local sample or window. Since the local sample size(s) used in non-parametric esti-
mation is (are) typically much smaller than the whole sample, one cannot (usually)
estimate production function and its marginal effects as accurately as with paramet-
ric methods (conditionally that parametric model is the correct one).2 Moreover, in
finite samples local estimation techniques can be sensitive to local multicollinearity
and identification problems (e.g., Frlich (2006)). This is because in local window(s)
values of certain variable(s) do not necessarily vary much or might even get only one
value, in which case the identification may become difficult (or even infeasible). In
public capital productivity estimation, local multicollinearity issue can be relevant,
if e.g., local samples would consist mainly (or only) of observations from the same
region. In that case, it might be difficult to separate the effects of public capital from
the region effects, as values of public capital would not change much for local samples.
In our empirical analysis, we will consider multicollinearity further in both parametric
and non-parametric estimation.
Another issue of methodological debate is non-stationarity. Non-stationarity of US
data has been suggested as a root of unreliability in public productivity analysis (e.g.,
Aaron 1990; Tatom 1991). Non-stationary series are especially typical for the long
time series data, while in the shorter panels this does not usually cause major problems.
Even though we use only a short time span (5 years) in our estimations and thus do
not expect possible non-stationary to impact the results, we employed four common
(parametric) panel unit root tests [presented by Maddala and Wu (1999), Levin et al.
(2002) (LLC), Im et al. (2003) (IPS), and Pesaran (2007)].3 Based on these tests,
non-stationarity did not seem to be a problem for our short panel. Thus, we decided to
employ level variables in both parametric and non-parametric estimations (see Sect. 4
for further details). Furthermore, although we do not specify any correlation struc-
ture for error terms, the non-parametric approach to be utilized in the paper allows
weak dependence in the data, which means that estimates are robust, e.g., for spatial
autocorrelation (see, Li and Racine (2007); Henderson and Kumbhakar (2006)).
Finally, one additional econometric issue that has been discussed in the literature is
possible endogeneity of input variables in the production function. Although endoge-
neity can potentially affect estimation results, estimates from OLS and instrumental
variable (IV) models have not been very different in many previous public capital
productivity studies. This seems to be also the case with our data, where we obtained
very similar results from linear models with and without instrumental variables, when

2 One of the most relevant disadvantages of non-parametric regression is the curse of dimensionality prob-
lem, which means that one cannot add many continuous explanatory variables to model without losing the
accuracy of the estimation.
3 According to the Maddala and Wu test, we could reject the null hypothesis that all the series are non-
stationary for all other variables except for gross regional product, while the LLC and the Pesaran test
(that accounts also for cross section dependence unlike the other three methods) rejected the null of non-
stationarity of all series for all variables. Based on the IPS test the non-stationarity of private capital and
gross product can be rejected only after first differencing while for others it can be done directly. However,
according to Karlsson and Lthgren (2000) the LLC and IPS test have low power with small T and potential
risk arises for concluding non-stationarity of the whole panel even if most of the panels series were, in
fact, stationary.

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the second lags of the input variables were used as instruments.4 More importantly,
based on the influential paper by Wang and Phillips (2009), Phillips and Su (2011)
have recently formally shown that in panel data setting non-parametric functionals
involving endogenous regressor can be consistently estimated with usual non-para-
metric kernel techniques without resorting to any instrumental variables, provided that
the endogenous regressor has plenty of cross-sectional variation and is not constant
over time (i.e., has some within variation). As this is the case for all input variables
in our data, we would expect endogeneity to be a smaller problem in non-parametric
than parametric estimation. Because of this and for the reason that non-parametric
instrumental variable estimation is quite challenging to implement, we decided to
leave it for an interesting avenue of future research. To conclude, it would seem that
non-stationarity and endogeneity are not posing major problems for capital productiv-
ity estimation in our setting, while multicollinearity and heterogeneity are potentially
highly important issues with (Russian) capital data.

2.2 Previous studies with Russian data

Several studies have been made on estimating the magnitude of Russian capital and
its role in Russian GDP or total factor productivity (TFP) growth (e.g., Kushnirsky
(2001); De Broeck and Koen (2000); see a thorough review in Izyumov and Vahaly
(2008)).5 Basdevant (2000) builds an econometric model of Russia through which he
carries out simulations on impacts of public capital investments and different policy
measures.6 There have not been, however, any empirical studies comparing the impor-
tance of public and private capital in Russia. In fact, to our knowledge Dodonov et al.
(2002) is the only previous study comparing productivity between public and private
capital in a transition country setting7 where Russia is included in the panel. They
obtain a high (0.6) and significant estimate for public investment elasticity, but they
are not analyzing capital stock and their study is subject to some methodological and
data problems.8

4 Of course, it is possible that lagged variables are not necessarily very good instruments. However, we
used them in the absence of better instruments.
5 Recently, very comprehensive TFP analysis for transition countries has been published by World Bank
(Alam et al. 2008).
6 He analyzes an increase of 10 % in public investments and concludes: Despite this first negative effect
on private investment the global effect is still a constant increase in output along the period. This again
emphasizes the important role of public investment: in a context of increasing tax collection public author-
ities should have a major role to promote investment, and hence the optimal policy should not focus on
reducing all expenditures in order to reduce public deficit.
7 A theoretical paper by Aghion and Schankerman (1999) analyzes the impact of infrastructure investments
on the transition process.
8 They have a panel of less than hundred observations from thirteen transition countries in 19921997. This
is a period of major turmoil within these countries which might undermine the data reliability. Moreover,
the estimated models assume marginal effects of inputs to be homogeneous across countries (and time),
even though there is a major heterogeneity among the countries (e.g., Russia and Estonia) due to, e.g., pace
of market reforms. In addition, they analyze investments (not captial stock) in a production function setting
which is somewhat problematic and proxy private investments with countrys gross investments and public
investments with gross government expenditure.

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200 M. Kortelainen, S. Leppnen

A somewhat distant research area to ours using transition data is research related to
privatization. Brown and Earle (2000) analyze Russian firm level data and conclude
that privately owned firms outperform the publicly owned ones. In their meta-analy-
sis of several transition enterprise data studies Djankov and Murrell (2002) find that
in the CIS-countries9 the traditional, non-privatized, state firms are underperformed
only by firms that were privatized to incumbent workers. However, they also find
that commercialized state firms (formally privatized but include state ownership)
perform roughly as well as firms under other forms of private ownership.

3 Data and Russian capital

Our unique data set on the ownership of Russian capital was compiled by Rosstat. The
collection of the data on the regional level was initiated only in the beginning of 2000s,
which limits the time span of our analysis to 20032007 and totals to 395 observations
with 79 regions.10 The capital data has been directly collected from firms accounting
data. In Russia, all large and medium sized firms have to report their main balance sheet
figures, including fixed capital.11 Concerning total fixed capital in Russia, our data
excludes capital of small firms, the capital of so-called non-commercial organizations
(public schools, hospitals, housing, etc.) and households capital.12 So, our public
capital data concerns public infrastructure (public electricity, gas and water supply
and transport infrastructure) capital and capital of completely state owned commer-
cial organizations. The latter is an exception to previous studies with US data but it is
impossible to separate it from the pure infrastructure capital in the Russian data. On
the other hand, state has such a major and entangled role (e.g., the gas giant Gazprom)
also in the real economy in Russia that it might be somewhat artificial to try to separate
the capital of public commercial firms and public infrastructure in Russias economic
setting. Moreover, large Russian firms, both private and public, are often partly or
wholly responsible for the basic infrastructure of the surrounding community despite
the fact that it is not related to their core operations and should be by the law under
authorities responsibility. This practice initiated in the Soviet time is still surprisingly
common in Russia due to institutional reasons (Leppnen et al. 2012) and makes it
more natural to lump in together both production and infrastructure capital in Russian

9 Commonwealth of Independent States, a successor organization to Soviet Union which includes twelve
former Soviet Republics, Russia among them.
10 The Republic of Chechnya was excluded due to missing data. Figures from autonomous Okrugs are
included in the data of their administrative centre regions.
11 Entry of new fixed capital, liquidation of assets, amount of fixed capital at the end of the year and
depreciation over the year. Almost all firms use so-called straight line depreciation method which simply
means that in the accounting a monthly depreciation expense equals the initial value of the asset divided by
the useful duration of capital in months. The useful duration for each capital item is defined by an official
decree.
12 Regarding the omission of small firms, we would not expect it to have much impact on the results.
According to Rosstats publicly available fixed capital statistics, small firms own a very minor share (1
2 %) from the total fixed assets in Russia. In addition, from fixed investments the share of small firms is not
much larger (about 2.54 %). In any case, since we do not have data for small firms, we cannot investigate
the impact of this omission.

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Public and private capital productivity in Russia 201

Table 1 Structure and growth of Russian fixed capital by economic activities (%)

Physical growth to Share of

previous year total fixed
capital
2004 2005 2006 2007 2007

Total fixed assets 1.6 1.9 2.4 3.0 100

Agriculture, hunting, and forestry 2.5 2.1 0.9 0.3 3.3
Fishing, fish farms 0.9 1.0 0.2 0.2 0.1
Industrial production
Mining and quarrying 5.0 4.6 5.4 6.4 8.0
Manufacturing 3.7 3.8 4.1 4.9 8.1
Electricity, gas and water supply 0.4 0.7 0.9 1.6 6.9
Construction 0.1 0.2 0.2 0.7 1.4
Wholesale and retail trade and commission trade; repair 2.4 4.6 5.9 6.6 2.2
of motor vehicles, motorcycles; personal and
household goods
Hotels and restaurants 1.6 2.1 2.5 2.6 0.7
Transport and communication 2.1 2.5 2.8 3.2 31.3
Financial intermediation 5.0 4.5 6.3 7.0 1.3
Real estate, renting, and related activities 0.8 0.9 1.2 1.5 23.1
Public administration and defence; compulsory social security 3.9 4.9 6.4 7.1 4.2
Education 0.6 1.4 2.3 3.1 4.0
Health and social work 2.1 2.9 3.7 4.7 2.8
Other community, social, and personal service activities 3.3 3.9 4.6 5.3 2.8
Source Rosstat (2008)

Table 2 Capital division by ownership (% of total commercial capital) in Russia, medium and large enter-
prises

Type of Federal Regional Municipal Community Private Joint private Foreign Joint Russian
ownership and religious ownership + state ownership and foreign
organizations ownership

In 2003 13.1 6.5 9.7 0.0 23.7 18.4 2.0 27.2

In 2007 13.2 7.0 2.8 0.0 29.5 24.0 4.1 19.3
Source Data compiled by Rosstat

case than with other countries data. Tables 1 and 2 show the recent development and
structure of Russian total fixed capital in 2007 and the ownership structure of capital
data. Concerning public ownership (Federal, regional, and municipal) the share of
Federal ownership is the clear majority while in the US the situation is reversed (see,
Gramlich (1994)).
The three largest entities in the fixed capital structure are industrial production,
transport, and real estate constituting more than three quarters of total fixed capital
in Russia. The decay of the agricultural sector is evident despite the high tide of the
Russian economy in general. A noteworthy fact of Russian fixed capital is the large
share of joint Russian publicprivate (JPP) firms; averaging twenty percents in our

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data during 20032007. Naturally, a question arises whether JPP firms should be cate-
gorized as public or private firms. As the question is somewhat ambiguous we will not
use the jointly owned capital in our basic model where only purely private and public
capital accompanied with private labor are used to explain private gross product. How-
ever, to explicitly address this Russian peculiarity we will run a second model where
we use total gross product as the dependent variable and total employment with three
capital variablesprivate, public, and joint publicprivate capitalas regressors. The
first model then examines the complimentary capital, or spillover effect, argument of
public capital. The second model explicitly compares the output elasticity of capital
of different ownership types in the Russian economy.
Major benefit in our data is the uniform accounting approach which eases the tradi-
tional empirical problems of depreciation and aggregation in capital related analysis.
In the Russian case there are, however, other factors which should be brought up.
First is the so-called dead capital dilemma referring to Soviet-era capital present in
the firms books but hardly used in current production. Methods used for dead capital
adjustment in the literature are adjustments to capacity utilization, higher depreciation
rate and assuming some total share of Soviet time capital that was effectively elim-
inated by the market transition (see, Izyumov and Vahaly (2008), for a discussion).
Studies reviewed by Izyumov and Vahaly estimate that Russian capital stock roughly
remained at the 1991 level or decreased by up to 7.5 % prior to the 1998 crisis. While
this dilemma is inescapable to some extent, we argue that its severity diminishes in
time as dead capital is gradually eaten up from the firms books and thus our fresh
data from 2003 to 2007 is not likely to be severely handicapped by this factor.
The second problem relates to deflation which is a challenge for any fixed capital
analysis. As our data is presented in book value, the proper deflation of capital becomes
extremely complicated. This follows from the fact that most firms use straight line
depreciation and thus capital items with different useful life times and purchase dates
should be deflated separately. There are no robust ways to circumvent this problem.
However, if the deflation problem is similar to both private and public capitalwhich
is not an implausible assumption as both are derived similarly from accounting data
the effects should be largely absorbed by time dummies. Thus, all the monetary figures
in our data were deflated to a base year using Rosstats implicit GDP deflator.
Data for labor and the output variable are from the Rosstats Regioni Rossii data-
base. As a measure of labor we use the number of employees in the region. Hours
worked would be better variable for labor but such data is not generally available for
Russia. Gross regional product (GRP) is our total output measure. Capacity utilization
has not been accounted for in the reported estimations as the effect to results was
insignificant.13 On the other hand, the insignificance of utilization rate on the results
supports the assumption that the dead capital problem is not very severe in our data.

13 We had survey-based estimates by IET (2008) on capacity utilization rate separately for Russian state
and non-state firms at the national level. During the estimation period, capacity utilization grew from 57
to 67 % for state and from 60 to 73 % for non-state firms. Adjusting the data for these utilization rates
produced only very small effects with OLS estimates and only time dummy effects for the other models.
Instead of capacity utilization rates, Henderson and Kumbhakar (2006) use unemployment to control for
business cycle effects. However, we find this unnecessary as our estimation period is of steady growth and
time effects already should be able to account for business cycles.

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Public and private capital productivity in Russia 203

Table 3 Summary statistics for the log of continuous variables

Variables (logs) Mean Std. dev. Min Max

Total output 18.150 1.145 15.375 22.004

Private output 17.015 1.299 13.756 21.129
Total employment 6.359 0.924 3.532 8.764
Private employment 5.688 1.029 1.686 8.122
Public capital 17.156 1.086 13.575 20.819
Private capital 16.866 1.397 11.975 20.990
Joint capital 16.364 1.526 9.923 21.468

For the private output we will have to use a proxy as such measure is not directly
available for Russian regions. Our proxy for gross private output consists of industrial,
construction and trade sectors because ownership division of their output is available
in the Rosstat statistics at the regional level. These three sectors together constitute
more than sixty percent of Russias GDP so they should form a representative proxy.
In our data, private output is thus obtained by multiplying the total output figures with
the combined share of the three sectors for the particular region and year. Finally, it
should be noted that the period under analysis was characterized by quite strong and
stable growth in Russia fueled by the soaring global energy prices. Although we do
not explicitly control for energy prices in our regressions, we note that time dummies
should capture the impact of energy prices that are similar across regions.
Table 3 shows the summary statistics for the log-variables used in the analysis.
Note that there is large variation in the values of variables reflecting huge heterogene-
ity present among Russian regions.

4 Econometric methods

4.1 Parametric approaches

Parametric models to be estimated in this study include pooled OLS, random effects
(RE), fixed effects (FE), first differences (FD), and OLS with aggregated region
effects (ARE). The first four models are standard panel data models that have also
been frequently used in previous studies, while ARE can be seen as a restricted FE
model with a smaller number of regional effects, or as a more comprehensive OLS
model. Theoretically, our viewpoint is that of regional level planner, aiming at allocat-
ing resources between public and private sector to maximize regional product. This
is modeled through a standard CobbDouglas production function with private sec-
tor output or gross regional product as the output variable. We will not use flexible
functional form specification (such as translog), because its estimation would create a
serious multicollinearity problem especially with a short panel data. Thus, our linear
estimation equation in log-linearized form is

yit =  xit + it , i = 1, . . . , N and t = 1, .., T (1)

123
204 M. Kortelainen, S. Leppnen

where yit = ln(outputit ), xit = (1, ln(KPit ), ln(KGit ), ln(LPit )) and KP, KG, and LP
denote private capital, public capital, and private labor.14 In the private output model,
output is the proxy for private output as explained in the data section. In the total
output model, output is total regional output. Furthermore, labor variable is now the
total regional employment and additional capital variable for the joint publicprivate
capital (JPP) is included as a regressor. When time and region specific effects are
included, we assume that it = i + t + it , where i are considered as region-spe-
cific constants in the FE model and as independent random variables in the RE model,
t are modeled using time dummies and it is an additive error term.
As mentioned above, besides traditional FE we will also employ aggregated region
effects (ARE) model to address the possible multicollinearity problem discussed in
Sect. 2 and studied further for our data in Sect. 5.1. This model controls for region
effects by dividing the regions into five economic categories instead of using own cat-
egory (or dummy variable) for each region. We want to emphasize that this division is
by no means arbitrary; it was introduced in 2005 by the Russian Ministry for Regional
Development (MINREG, henceforth) to steer the whole regional policy of Russia.15
Similar macroregion concepts have been developed for many other countries as well.
Within each cluster, MINREG aimed at gathering similar types of regions the devel-
opment of which requires similar policy measures. Clustering has been done on basis
of several quantitative and qualitative characteristics such as technological base and
market positioning. The regional clusters are divided into growth centres, supporting
regions and depressive regions. Supporting regions are further divided into raw mate-
rial regions and old industrial regions and depressive regions into background and
crisis regions. This gives us five regional categories in total (growth, old industrial,
background, crisis, and raw material regions).

4.2 Non-parametric approach

In addition to traditional parametric models, in this paper we will estimate a flexible

production function that allows all variables to enter non-parametrically. In general,
non-parametric regression techniques estimate the conditional mean function locally,
allowing the data to speak for themselves in determining the shape of the production
function without specifying any parametric structure. By relaxing all the parametric
assumptions used in log-linear specification, we can allow all kind of non-lineari-
ties and interactions among regressors. Although there are number of non-parametric
methods available in literature, we follow Henderson and Kumbhakar (2006) and use

14 We estimated the models also with a human capital proxy (annual number of graduates from secondary
schools), but it was omitted from the final regressions as it proved to be insignificant.
15 MINREG was founded during Vladimir Putins first term presidency. New regional development strat-
egy prepared by the MINREG was approved by the Russian government in 2005. The new strategy departed
from the traditional aim of regional equalization and suggested that Russia should reconcile to the fact that
the aim of regional equality in vast and highly heterogeneous Federation of Russia is not possible (RER
2005). One major principle of the new strategy was to differentiate regional policy between regional clus-
ters. Currently, the policy program has been embedded into other emerging regional policy programmes
but its usefulness to our purpose remains.

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Public and private capital productivity in Russia 205

generalized kernel estimation technique proposed quite recently by Racine and Li

(2004) and Li and Racine (2004). This is a new method to estimate non-paramet-
ric regression with mixed explanatory variables (i.e., both continuous and discrete
regressors). Formally, we consider the non-parametric regression model

yi = f (xic , xiu , xio ) + i , i = 1, . . . , N T (2)

where f () is the unknown smooth production function, xic is a vector of continuous

regressors similarly to the parametric model, xiu is a regressor that takes unordered
discrete values (regional effects), xio is a regressor that takes ordered discrete values
(time effects) and i is additive error term.
To estimate Model (2), we use local linear least squares (LLLS), which allows to
estimate f () and its marginal effects with respect to continuous variables xc simulta-
neously. This can done by taking a first-order Taylor expansion of f (x) at x0 , which
gives
 
yi f (x0 ) + (x0 ) xic x0c + i , (3)

where (x0 ) represents a marginal effect of f (x0 ) with respect to continuous com-
ponent. When dependent variable and continuous regressors are expressed in loga-
rithmic form, (x0 ) is interpreted as elasticity. This allows us to estimate elasticities
that are observation-specific, whereas CobbDouglas specification implicitly assumes
elasticities to be the same for every observation. Now letting f (x0 ) = (x0 ) and
(x0 ) = f (x0c )/xc , the production function and elasticities are estimated by mini-
mizing the following function with respect to and :
  2      
yi (x0 ) (x0 ) xic x0c K h xic , x0c l xiu , x0u , w xio , x0o , , (4)
i

   c 
  
P xi,c p x0,
c x x c
where K h xic , x0c = k p
is a product kernel function, k i, ph p 0, p is
hp
p=1
   
a univariate continuous kernel function for input p, l xiu , x0u , and w xio , x0o ,
are univariate discrete kernel functions for regional and time variables, and h =
(h 1 , . . . , h P ) , and are the bandwidths of the corresponding kernel functions.
For univariate kernel functions k (), l () and w (), we employ the standard normal
kernel and Li and Racine (2007) unordered and ordered kernel functions, respec-
tively.16 Although there exist alternative kernel functions both for continuous and
discrete variables, it is known that estimation results are generally not sensitive to
the choice of kernel functions. In contrast to kernel functions, non-parametric results

16 More specifically, the kernel functions are given by


k (z) = ez/2 / 2 , where z = xi,c p x0, c
p /h p and h p > 0,
 
l xiu , x0u , = 1 if xiu = x0u , and if xiu  = x0u , where [0, 1],

 
o o

x x

w xio , x0o , = i 0 , where [0, 1].

123
206 M. Kortelainen, S. Leppnen

can be sensitive to the values of bandwidth (or smoothing) parameters h, , and .

Basically, the larger value we choose for bandwidth, the more we are smoothing.
Therefore, a very large bandwidth may include too many points producing an overs-
moothed estimate, while a very small bandwidth may give an unsmoothed estimate.
Since it is difficult to justify any bandwidth value on subjective grounds, it is a gen-
eral practice to use the so-called automatic bandwidth choice methods to determine
bandwidth values. Here, we estimate bandwidth values using least-squares cross-val-
idation (LSCV). Another possible method to use in bandwidth estimation is Expected
Kullback Leibler (AIC) cross-validation (see, Hurvich et al. (1998)). However, the rel-
evant advantage of LSCV is that there exist asymptotic results for its bandwidths that
can be very useful in applied work. In particular, these results allow one to remove irrel-
evant regressors from non-parametric models and detect whether certain regressors
have linear impact on the dependent variable (see, Hall et al. (2007), for the asymptotic
results and Henderson et al. (2012), for an application). In general, irrelevant regressors
can be found by estimating bandwidths with LSCV using local constant least squares
(LCLS). If the bandwidth estimated with LSCV for continuous variable is very large
(or approaches infinity), one can conclude that the continuous regressor is irrelevant
for the non-parametric model. In the case of discrete regressors, explanatory variable
can be deduced to be irrelevant if the bandwidth approaches its upper bound, unity.17
To find out whether certain continuous variable enters linearly, we need to investigate
LSCV bandwidths from LLLS regression. If the estimated bandwidth is very large,
we can conclude that the impact of regressor is linear. We will follow Henderson et al.
(2012) by utilizing these results in our empirical analysis.
Finally, to compare parametric and non-parametric fits, we will apply HsiaoLi
Racine specification test (see, Hsiao et al. (2007)). This test helps us to find out whether
parametric linear models provide consistent estimates for mixed continuous and cat-
egorical data. If E(y| x) = f (x) is the true but unknown conditional mean function,
which is approximated by some parametric model f (x, ), the test uses the following
null and alternative hypothesis: H0 : E(y| x) = f (x, ) for almost all x in the support
of xi , H1 : E(y| x) = f ( x, ) on a set with positive measure. In addition to this speci-
fication test and the information provided by LSCV bandwidths, we will evaluate the
statistical significance of our elasticity estimates by calculating standard errors via
bootstrapping.

5 Results

5.1 Parametric models

We start by first presenting our results from the linear panel data regressions. The
results from pooled OLS, random and fixed effects, first differences and OLS with
aggregated region effects can be found in Table 4. Interestingly, fixed effects (FE)
model produces non-significant estimate for labor and negative and non-significant
estimate for public capital in the private output model. In the total output FE model

17 This is true independently whether one uses local constant or local linear least squares.

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Public and private capital productivity in Russia 207

Table 4 CobbDouglas estimates of private and total output elasticities

Private output model Total output model

(KG) (KP) (LP) (KG) (KP) (KJPP) (L)

Pooled OLS 0.373 0.482 0.253 0.377 0.240 0.159 0.262

0.032 0.032 0.041 0.026 0.024 0.016 0.040
Random effects (RE) 0.239 0.339 0.438 0.084 0.044 0.039 0.953
0.047 0.049 0.107 0.031 0.028 0.018 0.065
Fixed effects (FE) 0.090 0.135 0.053 0.038 0.044 0.002 0.958
0.058 0.047 0.090 0.029 0.029 0.016 0.374
First differences (FD) 0.082 0.158 0.000 0.044 0.013 0.007 0.356
0.050 0.049 0.000 0.027 0.022 0.020 0.342
OLS with aggregated region effects 0.330 0.411 0.314 0.308 0.196 0.120 0.310
0.030 0.025 0.040 0.022 0.020 0.013 0.035
Robust standard errors in italics, fixed and random effects models include state and time effects

estimates for all capital variables are non-significant while the elasticity for labor is
suspiciously high. In the random effects (RE) total output model, capital elasticities
are positive and mainly significant but very small and again the estimate for total labor
seems unrealistically high. Furthermore, the RE model is implausible in our case as it
assumes no correlation between the regional effects with the other regressors which
seems far from reality with our data. In the FD models the only significant estimate is
private capital in the private output model.
We argue that these weak estimates largely relate to problems of multicollinearity
and low time variation in variables (capital in FE and for all inputs in FD). In general,
high correlation among regressors can pose a range of notable problems for the analy-
sis from the non-significance of regressors to implausible magnitude or even wrong
sign of estimates (e.g., Greene (2003)). One measure designed to detect the multi-
collinearity problem is the so-called condition number (Belsley et al. 1980; Greene
2003). It is the largest singular value of the data, i.e., the square root of the ratio of the
largest and smallest characteristic roots. According to Belsley et al. (ibid.), a condition
value exceeding 30 can be an indication of potential multicollinearity problems. Ai
and Cassou (ibid.) obtain a condition number of the size 695.07 for the US capital
data including time and state effects which inclines them to conclude that multicol-
linearity poses a potential problem for the capital analysis with the US data. With our
Russian data, the problem is as severe. For the input regressor, the condition number
is 71.2 (see Table 5 below) while it reaches 458 when we add time and region effects
in the private output model. In the total output model including joint capital the situ-
ation becomes even worse. Another way to analyze multicollinearity is to regress the
desired independent variable with state and time effects and obtain the R 2 indicating
how much state and time effects explain variation in the regressor (see Ai and Cassou,
ibid.). Accordingly, with our data we obtained R 2 from 0.95 to almost one for all input
variables indicating severe multicollinearity (or low within variation).

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208 M. Kortelainen, S. Leppnen

Table 5 Assessing multicollinearity with region and time effects

Condition numbera R 2 from regressing variable on region

effects (all and aggregated) and time effects

Total Private KG KP JPP L LP

output output
model model

Pooled OLS total 90.8 71.2

Fixed effects total 1420.0 458.0 0.9815 0.9801 0.9482 0.9907 0.9997
OLS with aggregated 114.9 98.4 0.5298 0.4983 0.3962 0.3962 0.4959
region effects total
a Including constant, input variables and time and regional dummies

While the above results certainly refute the validity of RE model, they also suggest
a potential culprit behind the troubling estimates in the FE model. In fact, as recently
formally shown by Choi (2012), the FE estimator can produce spurious regression
results for a panel data model with a weak time series variation in the regressor (such
as capital stock) leading to unreliable point estimates and faulty inferences (see also
Plmper and Troger (2007)).18 This is indeed the case for our application, where small
time series variation is especially problematic for public capital which by its nature
(e.g., highways and electricity networks) changes less than private capital which reacts
more to, e.g., business cycles. This makes it hard for the FE method to single out capital
effects from regional effects.
On the other hand, excluding regional effects due to multicollinearity would poten-
tially lead to severe omitted variable bias. One way to tackle the multicollinearity
problem could be to take first differences as this removes the region effects from the
model. However, despite the additional benefit of tackling potential non-stationarity,
we argue that FD is not a good approach at least in this case. This results from the
fact that besides the inherently small variation of the capital stock variable, our data
is from the period of smooth economic growth, which is why changes in variables are
relatively similar across time. In fact, for our short-panel FD is even more problematic
than FE due to the low variation in the first differences. This finding is again consistent
with the results of Choi (2012) who shows that also the FD estimator can produce spu-
rious regression results for regressor with weak time series variation. Moreover, if we
estimate the first difference model with the US data used, e.g., in HK and Baltagi and
Pinnoi (1995), both public and private capital become non-significant with coefficient
size 0.069 and 0.006, respectively, while labor has a significant coefficient of 0.96.
Thus, despite much longer data series and higher variance severe problems arise also
with the US capital data with the FD model.
To diminish the multicollinearity problem, we employed OLS with aggregated
region effects (ARE). Table 4 also shows the estimates from the ARE model, while

18 In their survey on production function estimation, Ackerberg et al. (2007) conclude that FE estimator
has not performed well in practice and often produces unreasonable low capital coefficients. Olley and
Pakes (1996) and Levinsohn and Petrin (2003) also find FE estimates of production function parameters to
be implausible in micro-level applications.

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Public and private capital productivity in Russia 209

Table 5 reports the relevant multicollinearity statistics. Regarding the latter, the MIN-
REG classification would seem to suit well for the purpose as the condition number
drops to 98.4 and 114.9 for the private and total output models, respectively, when we
replace region effects with the five MINREG categories. Accordingly, the R 2 s from
models where the independent variables are regressed with region and time dum-
mies drop considerably with aggregated regional effects. Nevertheless, the MINREG
regional effects seem to capture a considerable part of regional variation as the R 2
obtained from regressing the GRP with respect to the five categories is 0.56 and 0.64
for the private and total output models, respectively, without any input variables.
With regard to elasticity estimates, there is a change compared to the fixed effects
model, as all estimates are now significant. In addition, although not reported in Table 4
the coefficients for aggregated region dummies are significant (with exception of raw
material category in the full model) and their signs are intuitive: compared to the
reference class (growth centres) all other categories except the raw material regions
obtained negative coefficient value. However, somewhat alarmingly the elasticity of
public capital exceeds the private one in the total output ARE model suggesting it to
be more productive in Russias economy. Also, public capitals spillover effect for the
private output seems quite high. These might reflect the limitations of the parametric
model to capture the vast heterogeneity and potential non-linearities in the Russian
data.
In conclusion, while multicollinearity seems to be a major problem for the fixed
effects model, alternative parametric approaches do not either produce satisfactory
results. In addition, elasticity estimates and test statistics are not robust across models,
but vary considerably. A potential reason for insufficiency of the used parametric mod-
els could be the fact that we have assumed elasticities to be the same across regions and
also over time. One possibility would be to use more flexible parametric specifications
(such as translog), which would allow elasticities to vary between regions and/or over
time. However, as noted before, this would strengthen the multicollinearity problem
even further and thus we do not follow this route.

5.2 Non-parametric models

The regions (Federal subjects) of Russia vary from huge and largely unpopulated
ones with massive natural resources to several major cities exceeding million inhabit-
ants. Due to the large differences in economic structures across regions, it is not easy
to justify that elasticities would be the same for all regions (and over time) as assumed
in the Cobb-Douglas specification estimated above. In this section, we will tackle this
issue by estimating production function and its input elasticities non-parametrically.
As in the parametric case, we first estimated a non-parametric model that includes all
regional and time effects.19 As explained earlier we employed least squares cross-vali-
dation (LSCV) to estimate the bandwidths both for continuous and discrete regressors.
To investigate possible irrelevant regressor and whether certain regressors enter line-
arly, we estimated LSCV bandwidths using both local constant least squares (LCLS)

19 We used the np package by Hayfield and Racine (2008) to estimate various non-parametric models.

123
210 M. Kortelainen, S. Leppnen

Table 6 Bandwidths (bw) for regressors

bw(KG) bw(KP) bw(JPP) bw(PL) bw(L) bw(Year) bw(Region)

Private output agg. regions, LLLS 1.6231 0.2948 0.3909 0.3864 0.0040
Total output agg. regions, LLLS 0.6701 0.3158 0.5745 0.2139 0.2327 0.0028
Private output all regions, LLLS 63781 99742 31.097 0.2402 0.0001
Total output all regions, LLLS 0.8423 3698 1995 0.3229 0.5185 0.0002
Private output agg. regions, LCLS 0.1869 0.2153 0.0523 0.2225 0.0295
Total output agg. regions, LCLS 0.3076 0.5658 0.4056 0.0230 0.2084 0.0125
Private output all regions, LCLS 0.6942 0.4903 0.9701 0.0050 0.0001
Total output all regions, LCLS 0.9290 0.8864 0.7454 0.3633 0.0000 0.0000
LCLS local constant least squares, LLLS local linear least squares

and local linear least squares (LLLS). We report the estimated bandwidths for different
models in Table 6. With regard to state effects in the local linear models, the optimal
values for the discrete bandwidths were almost zero (0.0001 and 0.0002). This means
that for all observations local samples (or windows) include basically only observa-
tions from the same region. Clearly, for our short-panel local sample sizes are not large
enough to estimate observation-specific elasticities accurately or credibly. Moreover,
due to the low within variation for public capital series, local multicollinearity makes
estimation of elasticities clearly non-robust. This finding was supported by the man-
ual testing (not reported here) where we checked the effects of different bandwidth
values on the elasticities. We found that the models with all region effects were much
more sensitive to changes in bandwidths (especially when they were reduced) than the
models including only the aggregated region effects.
To address the above problems, one can either increase bandwidth values arbi-
trarily or change the model. As it is extremely difficult to justify specific values for
discrete bandwidths and we do not want to make (arbitrary) subjective choices, we
decided to use the same restricted regional categories as in the ARE model above.20
This improves identification and decreases local multicollinearity problem, as local
samples will include observations from other regions too.
Based on the results of Table 6 we can also conclude that the bandwidths of public
capital do not approach infinity in local constant models and thus are not smoothed
out. This is the case independently of whether one uses restricted regional or all state
effects. Furthermore, we find LSCV bandwidths to be small for other inputs in local
constant models. In local linear models with aggregated regions all inputs have rel-
atively small bandwidths which imply that they do not have linear impact. We think
that this result gives more support for our choice of using non-parametric regression
to estimate the impact of public capital on private and regional output in Russia.

20 Different regional classifications (e.g., OECD or Latin America and Caribbean countries), instead of pure
region/country effects, are often used also in the growth literature with datasets consisting of heterogeneous
countries (see, e.g., Huynh and Jacho-Chvez (2009), with very similar non-parametric methodology; they
have five regional categories for data of 125 countries).

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Public and private capital productivity in Russia 211

Table 7 Local linear estimates of output elasticity

Private output model Total output model

(KG) (KP) (PL) (KG) (KP) (KJPP) (L)

Mean 0.122 0.376 0.480 0.077 0.144 0.101 0.222

First quartile 0.025 0.165 0.191 0.048 0.024 0.020 0.073
0.026 0.195 0.080 0.042 0.140 0.076 0.153
Second quartile 0.164 0.375 0.430 0.106 0.139 0.080 0.358
0.015 0.205 0.137 0.060 0.107 0.051 0.159
Third quartile 0.284 0.624 0.708 0.262 0.392 0.193 0.738
0.044 0.125 0.129 0.060 0.129 0.048 0.149
Share of positive elasticities 77.5 87.6 86.6 67.1 70.6 70.4 69.9
Share of significant elasticities at 5 % level 86.3 62.8 79.2 75.4 61.3 56.5 71.1
Both models include time and aggregated regional dummies. Standard errors for the point estimates of
quartiles are presented in italics

By using only five categories (instead of 79) for regional effects we were able to
get sound and stable estimates from the non-parametric regression. Besides estimating
non-parametric production function and its elasticities, we used the HsiaoLiRacine
specification test (Hsiao et al. 2007) to compare fits of parametric model against non-
parametric model. The test firmly rejects the null hypothesis ( p-value = 0.0000) that
the CobbDouglas specification with aggregated regional and time effects would be
the correct one for both private and total output models.21 Thus, similarly to US data
(compare Henderson and Kumbhakar (2006)), the non-parametric model seems to be
superior also for the Russian economy.
The main results from the preferred non-parametric model (based on LLLS regres-
sion) are reported in Table 7 and in Fig. 1. Since non-parametric estimation gives us
observation specific estimates, we report the mean and quartile values of the estimated
elasticities for public and private capital and labor. In Table 7 we also present the share
of significant observations as to our mind this provides informative data on variables
significance for a regression with observation specific estimates. In addition, Fig. 1
illustrates the distribution and heterogeneity of elasticity estimates for the capital vari-
ables. These distributions have been constructed by estimating kernel density for the
obtained elasticity estimates.
There are several noteworthy things in the regression results. First of all, with the pri-
vate output model we see that the spillover effects of public capital are heterogeneous
and therefore not constant across regions (or observations). The average elasticity for
public capital is positive but considerably smaller than in the parametric case. This is
due to the fact that 23 % of estimates are actually negative. Secondly, the significance
of public capital is relatively strong as 86 % of the estimates are significant at the
5 % level. Moreover, on a closer look we note (not visible here) that significance is

21 In addition to nave bootstrapping, the null was also strongly rejected when using Rademacher wild
bootstrapping that allows conditional heteroskedasticity.

123
212 M. Kortelainen, S. Leppnen

Fig. 1 Kernel densities of capital elasticities

much higher in the positive side of the distribution: from positive elasticities 91 % are
significant while from negative elasticities 70 % are significant. In addition, for the
first quartile (consisting of negative values) almost 40 % are insignificant while for
the fourth quartile of about one hundred largest estimates there are no insignificant
observations. Thirdly, it is worth noticing that there is also quite a lot of heterogeneity
in elasticities for private capital and labor. Interestingly, for private capital the average
elasticity is quite close to the parametric estimate, while for private labor the average
elasticity clearly deviates from the corresponding parametric estimate.
In the total output model we get to compare the productivity of capital for the
three different ownership types. All are clearly positive on the average. Contrary to
the parametric case, private capital is now more productive than public capital which
seems more intuitive. Given the major role of government in the energy sector and
the high energy prices of data period, the difference might be larger under differ-
ent macroeconomic circumstances. Interestingly, the public capital elasticity is also a
bit smaller than the average elasticity of joint privatepublic capital. However, since
median elasticity is a bit larger for public capital than for joint capital, our cautious
interpretation is that these two capital types are roughly as productive. The share of
insignificant observations is now a bit larger than for the private output model. But

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Public and private capital productivity in Russia 213

with closer look we can say that this is roughly due to the lower estimates as for the
higher half of the estimates more than 90 % are significant for all inputs.

6 Discussion and conclusions

In this paper, we have presented the first estimates for the productivity of Russian
private and public capital. Dozens of similar studies have been carried out with US
and other OECD countries data. To our knowledge this is only the second paper,
preceded by Henderson and Kumbhakar (2006 with US data) utilizing non-paramet-
ric regression methods in capital productivity analysis. Furthermore, due to different
economic structure of Russia we tested both the spillover effects of public capital on
private production (the theme of most interest in the literature) as well as direct pro-
ductivity differences of different capital ownership types on total production. In the
latter case, we included joint private-public capital as a regressor because it is quite
common ownership type in Russia.
A lot of attention in our paper was given to two methodological factors: multicol-
linearity and heterogeneity. While the inclusion of state and time effects into capital
productivity estimation is well justified in econometric terms, it would seem to cause
major problems for robust estimation due to severe multicollinearity problems. The
estimation methods are unable to single out the impact of capital from state effects due
to small variation in time, inherent to the capital stock variable, resulting in inaccu-
rate estimates. Public capital is more prone to this problem than private due its lower
time variation. First differencing would remove multicollinearity but it often further
diminishes the time variation producing again non-significance for both capital vari-
ables. The problem is exacerbated with short panels as in our case with Russia. To
diminish the problem we introduced a restriction on the state effects (five regional
dummies) based on economic classification of Russian regions by the Ministry for
Regional Development. The idea was to grasp as much as possible from regional
unobserved characteristics without imposing too serious multicollinearity problems.
This approach seemed to alleviate the multicollinearity problem considerably, but was
yet unable to grasp regional heterogeneity sufficiently. Due to the potential severity
of the multicollinearity problem in applications involving capital variables, we feel
that controlling for this problem should be taken as a standard procedure in relevant
studies.
To tackle the heterogeneity issue we used non-parametric local linear regression.
However, while multicollinearity problems may alleviate with the US data in the
non-parametric estimation (based on results by Henderson and Kumbhakar (2006)),
similar model (based on automatic bandwidth selection) produced inaccurate and non-
robust estimates in the Russian case. This is likely to result from the fact that US data
exhibits more variation due to longer time series, more cyclical fluctuation and less
regional effects (50 US states vs. 79 Russian regions) than the Russian 5 year panel
characterized by steady growth. With larger variation, the non-parametric method is
able to single out capital effects from state effects. However, introducing restricted
regional effects for Russian data produced sound and stable results from the non-para-
metric regression and was deemed superior to parametric approach according to the
HsiaoLiRacine specification test.

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214 M. Kortelainen, S. Leppnen

For private output we had to use a proxy consisting of ownership in industrial, con-
struction and trade sectors. As these sectors constitute more than 60 % of Russian GDP
on the average, we feel that it is a good proxy for the general ownership distribution of
production. Our non-parametric results produced average estimates of 0.12 and 0.38
for public and private capital elasticity on private production, respectively. For public
capital, the estimate is almost identical to 0.11 obtained by Henderson and Kumbhakar
(2006) for the US (their estimate for private capital elasticity was 0.31). Our results
suggest that the impact of public capital in Russia is heterogeneous. For some regions
its contribution to private output is insignificant or even negative but for most regions
its contribution is clearly positive and significant. This kind of information would be
impossible to obtain with methodological approach largely used in the earlier literature
and could thus lead to ill-informed conclusions. However, one should note that the
comparison to earlier studies with, e.g., US data is not completely straightforward as
our data includes the capital of state owned commercial firms in addition to traditional
infrastructure capital and excludes social capital such as public schools and hospitals.
Somewhat similar results arise when directly comparing the productivity of dif-
ferent capital ownerships on total output. With traditional methodologies we get very
disturbing results of non-productivity for all ownership types of Russian capital. By
decreasing multicollinearity with aggregated region effects we get better results but
suspiciously high estimates for public capital. Taking also regional heterogeneity into
account our non-parametric results suggests that elasticity of private capital is 0.14 on
the average while that of public capital 0.08. Moreover, the latter is a bit smaller than
the average elasticity of joint private-public capital (0.10). However, since median elas-
ticity is a bit larger for public capital than for joint capital, our cautious interpretation
is that these two capital types are roughly as productive.
Methodologically, probably the most interesting extension to the present work
would be to use non-parametric instrumental variables techniques to control for pos-
sible endogeneity problems in productivity estimation. For this purpose one could use
either kernel-based estimators (Hall and Horowitz 2005; Darolles et al. 2011) or series
estimators (Newey and Powell 2003; Blundell et al. 2007). Even though the use of
these flexible estimators always requires plausible instrument(s), this kind of exercise
could give further information on the difference between parametric and non-para-
metric approaches and possibly give new insights for the public capital productivity
analysis.

Acknowledgments We would like to thank anonymous referees for insightful comments and Vladimir
Bessonov from Moscow Higher School of Economics for the comments concerning the data used in the
paper. We also thank Laurens Cherchye, Kristof De Witte, Monica Giulietti, Alfonsina Iona, Timo Kuos-
manen, Tuukka Saarimaa, Svetlana Ledyaeva, Vania Sena, and Risto Vaittinen as well as the participants of
the EEA 2010 conference for the valuable comments. The second author thanks the Academy of Finland
for research finding.

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