EQUIPMENT INVESTMENT AND THE SOLOW MODEL

This paper investigates the correlation between equipment investment a nd economic growth, and its compatibility with the Solow growth model. The paper improves on previous work by starting from an explicit theo retical model, using recent data on human capital, taking a rigorous a pproach to outliers, using instrumental variables, and taking unobserv ed heterogeneity into account. Rates of return to investment, and thei r precision, are estimated. The main finding is that the implied retur ns to equipment investment are very high in developing countries.