Journal of Economics

, Volume 117, Issue 1, pp 37–48 | Cite as

Factor substitution is an engine of growth in a model with productive public expenditure

Article

Abstract

This paper examines the effect of the elasticity of substitution between public and private inputs on the optimal fiscal policy, long-run growth and welfare. To this end, we consider an endogenous growth model with productive public spending. If the baseline government size is suboptimally low (high), the higher the elasticity of substitution the higher (lower) are the optimal government size and, in the presence of congestion, the optimal income tax. In any case, the higher the elasticity of substitution the higher are the optimal long-run growth rate and welfare.

Keywords

Elasticity of substitution Productive public spending  Endogenous growth Welfare 

JEL Classification

H21 O41 

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Copyright information

© Springer-Verlag Wien 2015

Authors and Affiliations

  1. 1.Departamento de Economía Aplicada II, Facultad de Economía y EmpresaUniversidade da CoruñaA CoruñaSpain

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