Long-run growth and welfare in a two sector endogenous growth model with productive and non-productive government expenditure

Rolando A. Escobar-Posada and Goncalo Monteiro
Authors registered in the RePEc Author Service: Rolando A. Escobar Posada

Journal of Macroeconomics, 2015, vol. 46, issue C, 218-234

Abstract: We develop a two-sector model of physical and human capital accumulation, where public goods provide both productive capital (i.e. infrastructures) and utility enhancing services. We analyze the impact of both the level of government expenditure and its composition on growth and welfare, under different production technologies, and derive their respective growth and welfare-maximizing levels. We show that contrary to what happens with welfare, the long-run growth rate is increasing in the intertemporal elasticity of substitution but decreasing in the relative weight of public goods in utility. Furthermore, the welfare-maximizing tax rate is lower than the growth-maximizing tax rate, whereas the welfare maximizing share of productive government expenditure is greater than the growth maximizing share. Finally, we employ numerical simulations to get a better understanding of the model.

Keywords: Infrastructure; Education; Utility enhancing public goods; Economic growth; Welfare (search for similar items in EconPapers)
JEL-codes: H54 I28 O41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:46:y:2015:i:c:p:218-234

DOI: 10.1016/j.jmacro.2015.09.008

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