This paper reexamines the effects of public capital on productivity growth at the regional level by using the Regional Japan Industrial Productivity Database. When we estimate a production function including public capital in TFP, we find positive and significant effects of public capital on productivity growth after the collapse of the bubble economy. Our results imply that public investment after 1991 was allocated more efficiently than before 1990, because total public expenditures have decreased since the mid 1990s. However, the dispersion of the estimated rate of return on public capital and its Tobin’s Q has expanded since 1991. This implies that the government has allocated public capital to rural areas more heavily than to urban areas.
