We consider a two-sector economy, where public infrastructure un- evenly affects the productivity of the sectors. Private and public capital are produced with different technologies, and the sector producing the infrastructure is not benefitting from its services. The government provides both infrastructure investment and a flow of intermediate goods, enhancing the productivity of the sector producing the infrastructure. We show that this economy displays perpetual growth whenever the share of public expenditure on intermediate goods is higher than that on infrastructure. In the long run the public capital, the private capital and the GDP grow at the same steady rate and the share of total public expenditure on GDP is constant. We study numerically the transition to the long run, along which the structural adjustments take place. We single out the conditions under whichthe tax rate is growth maximizing.
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Paper provided by Department of Economics University of Milan Italy in its series Departemental Working Papers with number
2009-28.
Find related papers by JEL classification: O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General H5 - Public Economics - - National Government Expenditures and Related Policies