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On the interaction between public investment and private capital in economic growth

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  • Alberto BUCCI

    ()

  • Chiara DEL BO

    ()

Abstract

This paper examines two possible sources of interaction between private and public capital in an endogenous growth model with productive public investment, which is used as an input both in the production of final output and in the production of new public capital. On the one hand ,public investment and private capital are complementary with each other in the production of goods. On the other, they can be either complementary or substitutes in the production of new productive public capital . In our model private and public capital are two reproducible productive inputs interacting with each other in goods production and in productive public capital investment. The share of public capital devoted to output production can be exogenous or endogenous, and we consider a Cobb-Douglas and a more general CES aggregate production function. Our main results are that, when the share of public capital devoted to output production is exogenous along the balanced growth path equilibrium the common growth rate is a negative function of this share and a positive function of the degree of complementarity between the two forms of capital in infrastructure capital investment. When the sectoral allocation of productive public capital is endogenous, the main determinant of the economy’s long run growth rate is, along with the model’s preferences parameters, the public capital’s share in GDP. Unlike existing literature (notably, Barro 1990), we find that the relationship linking the economy’s growth rate and the public capital’s share in GDP is U-shaped, rather than monotonically decreasing.

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Bibliographic Info

Paper provided by Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano in its series Departmental Working Papers with number 2009-44.

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Date of creation: 03 Nov 2009
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Handle: RePEc:mil:wpdepa:2009-44

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Keywords: Economic Growth; Complementarity; Productive Public Investment; Private Capital;

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  1. Chiara DEL BO & Massimo FLORIO, 2008. "Infrastructure and growth in the European Union: an empirical analysis at the regional level in a spatial framework," Departmental Working Papers 2008-37, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  2. Aiyar, Shekhar & Dalgaard, Carl-Johan, 2009. "Accounting for productivity: Is it OK to assume that the world is Cobb-Douglas?," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 290-303, June.
  3. Bentollia, S. & Saint-Paul, G., 1999. "Explaining Movements in the Labor Share," Papers 9905, Centro de Estudios Monetarios Y Financieros-.
  4. GROWIEC, Jakub, 2006. "Fertility choice and semi-endogenous growth: where Becker meets Jones," CORE Discussion Papers 2006023, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Miguel D. Ramirez & Nader Nazmi, 2003. "Public Investment and Economic Growth in Latin America: an Empirical Test," Review of Development Economics, Wiley Blackwell, vol. 7(1), pages 115-126, February.
  6. Andreas Irmen & Johanna Kuehnel, 2008. "Productive Government Expenditure and Economic Growth," CESifo Working Paper Series 2314, CESifo Group Munich.
  7. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
  8. David E. Bloom & David Canning & Jaypee Sevilla, 2001. "The Effect of Health on Economic Growth: Theory and Evidence," NBER Working Papers 8587, National Bureau of Economic Research, Inc.
  9. Miguel Ramirez, 2000. "The impact of public investment on private investment spending in Latin America: 1980–95," Atlantic Economic Journal, International Atlantic Economic Society, vol. 28(2), pages 210-225, June.
  10. Erdal Atukeren, 2005. "Interactions Between Public and Private Investment: Evidence from Developing Countries," Kyklos, Wiley Blackwell, vol. 58(3), pages 307-330, 07.
  11. John Creedy & Ross Guest, 2008. "Discounting and the Time Preference Rate," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 109-127, 03.
  12. Chris Papageorgiou & Kaz Miyagiwa, . "Elasticity of Substitution and Growth: Normalized CES in the Diamond Model," Departmental Working Papers 2001-05, Department of Economics, Louisiana State University.
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