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Fiscal spending for economic growth in the presence of imperfect markets

López, Ramón and Asif Islam
Authors registered in the RePEc Author Service: Ramon Lopez

No 8709, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Political economy factors tend to induce many governments to spend on private goods (non-social subsidies) to the detriment of spending on social and public goods. We show that this bias in spending patterns is particularly costly for economic growth when capital markets are imperfect. We thus provide a simple taxonomy of government spending: spending in goods that mitigate market failures versus spending in non-social subsidies which frequently have the sole purpose of benefiting special interest groups. We develop a theoretical model and link it quite closely to an empirical model. The empirical results fully corroborate the hypothesis that spending biases in favor of non-social subsidies reduce the rate of economic growth over the long run. The empirical findings are exceptionally robust.

Keywords: Government spending; Non-social subsidies; Market imperfections; Economic growth investment (search for similar items in EconPapers)
JEL-codes: H42 H44 H5 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-fdg and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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