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How Do Public Investment and Financial Factors Affect Growth in a Debt-Overhang Economy?

Bruno Amable and Jean-Bernard Chatelain ()

The Manchester School of Economic & Social Studies, 1997, vol. 65, issue 3, 310-27

Abstract: In this paper, informational frictions lead to a rationing on the external finance of the firm in proportion to its internal net worth. The authors study the endogenously generated growth of an economy with heterogeneous firms facing a credit constraint. The productivity of individual firms is affected by the size of public infrastructures subject to congestion which are financed through taxes on profits. Growth will be influenced by the level of the interest rate through interest repayments (a debt-overhang problem) and by the tax rate. It is shown that there exists a growth-maximizing financing rule of public investment. Copyright 1997 by Blackwell Publishers Ltd and The Victoria University of Manchester

Date: 1997
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Handle: RePEc:bla:manch2:v:65:y:1997:i:3:p:310-27