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On the growth and welfare maximizing allocation of public investment

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Abstract

In this paper we present an endogenous growth model to analyze the growth maximizing allocation of public investment among N different types of public capital. Using this general model of public capital formation, we analyze the stability of the long-run equilibrium and we derive the growth-maximizing values of the shares of public investment allocated to the different types of public capital, as well as the growth-maximizing tax rate (amount of total public investment as a share of GDP). The empirical implication of the model is that both the effects of the shares of public investment and the tax rate on the long-run growth rate are non-linear, following an inverse U-shaped pattern. Our analysis is completed by showing that the growth-maximizing shares of public investment and the growth-maximizing tax rate also maximize welfare in the decentralized economy.

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Authors and Affiliations

  1. Department of Economics, Faculty of Social Sciences, University of Crete, University Campus, 74100, Rethymno, Crete, Greece

    Pantelis Kalaitzidakis & Vangelis Tzouvelekas

Authors
  1. Pantelis Kalaitzidakis
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  2. Vangelis Tzouvelekas
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Correspondence to Vangelis Tzouvelekas.

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Kalaitzidakis, P., Tzouvelekas, V. On the growth and welfare maximizing allocation of public investment. J Econ 104, 127–137 (2011). https://doi.org/10.1007/s00712-011-0207-y

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  • DOI: https://doi.org/10.1007/s00712-011-0207-y

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