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Infrastructure and inequality

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  • Chatterjee, Santanu
  • Turnovsky, Stephen J.

Abstract

We develop a model in which public capital is both an engine of growth and a determinant of the distributions of wealth, income, and welfare. Government investment increases wealth inequality over time, regardless of its financing. The time path of income inequality is, however, highly sensitive to financing policies, and is often characterized by sharp intertemporal tradeoffs, with income inequality declining in the short run but increasing in the long run. Public investment generates a positive correlation between growth and income inequality along the transition path, but their short-run and long-run relationship depends critically on (i) how externalities impinge on allocation decisions, (ii) financing policies, and (iii) the time period of consideration. Finally, these policies also generate sharp trade-offs between average welfare and its distribution, with government investment improving average welfare, but also increasing its dispersion. Our results are obtained numerically but extensive sensitivity analysis confirms their robustness across key parameter values.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 8 ()
Pages: 1730-1745

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:8:p:1730-1745

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Public capital; Growth; Inequality;

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References

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Cited by:
  1. Pedro R. D. Bom & Jenny Ligthart, 2011. "Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1119, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. Bruce, Neil & Turnovsky, Stephen J., 2013. "Social security, growth, and welfare in overlapping generations economies with or without annuities," Journal of Public Economics, Elsevier, vol. 101(C), pages 12-24.
  3. Linus Mattauch & Ottmar Edenhofer & David Klenert & Sophie Bénard, 2014. "Public Investment when Capital is Back - Distributional Effects of Heterogeneous Saving Behavior," CESifo Working Paper Series 4714, CESifo Group Munich.

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