Public Capital, Public Pension, and Growth
AbstractThis paper constructs an endogenous growth model with overlapping generations, whose engine of economic growth is productive public capital. The government faces a trade-off in public policy between public investment and social security provision because of its budget constraint. Larger public investment accelerates economic growth. On the other hand, larger public investment reduces the social security provision. This may reduce the consumption stream of agents. We first show that when the government aims at growth maximization, it chooses no social security provision. However, we also show that the growth-maximizing policy does not maximize welfare levels of each generation on the balanced growth path. Early generations may demand social security provision because the benefits from economic growth caused by an acceleration of public investment are relatively small. In contrast, future generations may require no social security provision but a large amount of public capital. Additionally, by setting the tax rate below the level that maximizes the growth rate, the government can make the welfare levels of all generations from the initial state on the balanced growth path better off. Moreover, in an economy facing an aging population, an increase in the social security provision to the old rather than an increase in public investment can be preferable from the viewpoint of social welfare.
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Bibliographic InfoPaper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 10-03.
Length: 21 pages
Date of creation: Jan 2010
Date of revision:
public capital; social security; overlapping generations;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
This paper has been announced in the following NEP Reports:
- NEP-AGE-2010-02-13 (Economics of Ageing)
- NEP-ALL-2010-02-13 (All new papers)
- NEP-DGE-2010-02-13 (Dynamic General Equilibrium)
- NEP-FDG-2010-02-13 (Financial Development & Growth)
- NEP-MAC-2010-02-13 (Macroeconomics)
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