Public Investment and Corruption in an Endogenous Growth Model

Simge Tarhan

MPRA Paper from University Library of Munich, Germany

Abstract: High capital spending is favored by economists and politicians for its beneficial effects on economic growth. However, there is empirical research associating high levels of public investment with low economic growth due to corruption. I provide an endogenous growth model with Ramsey taxation that is consistent with this empirical finding. In the model, government maximizes the weighted average of consumers' utility and its own utility coming from expropriation of tax revenues. The weight determines the benevolence of the government. I show that a self-interested government sets a higher public-to-private-capital ratio than a benevolent one, reducing the productivity of public capital, in order to use more of the tax revenues for its own consumption. While a large public-to-private capital ratio increases the productivity of private investment, high taxes that come along with high public capital spending reduce the after-tax returns to private investment, causing the growth rate to be low.

Keywords: Corruption; Endogenous Growth; Public Investment; Ramsey Taxation. (search for similar items in EconPapers)
JEL-codes: D73 E62 H0 O4 (search for similar items in EconPapers)
Date: 2008-11-01, Revised 2010-03-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://mpra.ub.uni-muenchen.de/21319/1/MPRA_paper_21319.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/27273/1/MPRA_paper_27273.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/27274/1/MPRA_paper_27274.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/34205/4/MPRA_paper_34205.pdf revised version (application/pdf)

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