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The Politics of Endogenous Growth

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  • Chetan Ghate
  • Paul J. Zak

Abstract

Is it politically feasible for governments to engineer endogenous growth? This paper illustrates two reasonable political decision mechanisms by which fiscal policy generates endogenous growth with a single accumulable factor, under a constant returns to scale production technology, and without production externalities. In the first mechanism, optimal policies are chosen by the government to maximize constituent support by raising aggregate income. In the second mechanism, optimal policies are determined in a voting equilibrium where agents are concerned only with their own incomes. We demonstrate that policies that target aggregates generate balanced growth and are Pareto optimal. Policies chosen by the median voter also produce balanced growth, but result in public investment 50% below the socially optimal level.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.37717.de/dp320.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 320.

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Length: 12 p.
Date of creation: 2003
Date of revision:
Handle: RePEc:diw:diwwpp:dp320

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Keywords: Public Investment; Positive Political Economy; Median Voter Theorem; Endogenous Growth;

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References

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  1. Chetan Ghate & Paul J. Zak, . "Growth of Government And The Politics of Fiscal Policy," Claremont Colleges Working Papers 2000-19, Claremont Colleges.
  2. Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 183-204, January.
  3. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
  4. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  5. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  6. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  7. Chetan Ghate & Quan Vu Le & Paul J. Zak, 2002. "Optimal Fiscal Policy in an Economy Facing Socio-Political Instability," Discussion Papers of DIW Berlin 308, DIW Berlin, German Institute for Economic Research.
  8. Rioja, Felix K., 1999. "Productiveness and welfare implications of public infrastructure: a dynamic two-sector general equilibrium analysis," Journal of Development Economics, Elsevier, vol. 58(2), pages 387-404, April.
  9. Fisher, Walter H & Turnovsky, Stephen J, 1998. "Public Investment, Congestion, and Private Capital Accumulation," Economic Journal, Royal Economic Society, vol. 108(447), pages 399-413, March.
  10. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  11. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May.
  12. Glomm, Gerhard & Ravikumar, B., 1994. "Public investment in infrastructure in a simple growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1173-1187, November.
  13. Ghate, Chetan, 2001. "Lobbying, the Composition of Government Expenditures, and the Politics of Fiscal Policy," Australian Economic Papers, Wiley Blackwell, vol. 40(2), pages 133-45, June.
  14. William Easterly & Sergio Rebelo, 1993. "Fiscal Policy and Economic Growth: An Empirical Investigation," NBER Working Papers 4499, National Bureau of Economic Research, Inc.
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Cited by:
  1. Tatiana Fic & Chetan Ghate, 2004. "The Welfare State, Thresholds, and Economic Growth," Discussion Papers of DIW Berlin 424, DIW Berlin, German Institute for Economic Research.

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