Governmental activity and private capital adjustment

Ingrid Ott () and Susanne Soretz
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Ingrid Ott: Institute of Economics, University of Lüneburg

No 26, Working Paper Series in Economics from University of Lüneburg, Institute of Economics

Abstract: We analyze within a dynamic model how firms decide on capital investment if the accompanying adjustment costs are a function of governmental activity. The government provides a public input and decides on the degree of rivalry. The productive public input enhances private capital productivity and reduces adjustment costs. We derive the equilibrium in which capital and investment ratio are both constant, carry out comparative dynamic analysis and discuss the model's policy implications. Increasing the amount of the public input unequivocally spurs capital investment whereas the result becomes ambiguous with respect to the impact of rivalry. Since a reduction in congestion increases the individually available amount of the public input, crowding out effects may lead to a reduction in the equilibrium capital stock. Most of the analysis is conducted for general production functions, although the case of CES technology is also considered.

Keywords: Governmental activity; congested public inputs; adjustment costs (search for similar items in EconPapers)
JEL-codes: D21 H40 H54 O16 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2006-03-13
New Economics Papers: this item is included in nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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