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Public Investment and Corruption in an Endogenous Growth Model

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  • Tarhan, Simge
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    Abstract

    High capital spending is favored by economists and politicians for its beneficial effects on economic growth. However, there is empirical research associating high levels of public investment with low economic growth due to corruption. I provide an endogenous growth model with Ramsey taxation that is consistent with this empirical finding. In the model, government maximizes the weighted average of consumers' utility and its own utility coming from expropriation of tax revenues. The weight determines the benevolence of the government. I show that a self-interested government sets a higher public-to-private-capital ratio than a benevolent one, reducing the productivity of public capital, in order to use more of the tax revenues for its own consumption. While a large public-to-private capital ratio increases the productivity of private investment, high taxes that come along with high public capital spending reduce the after-tax returns to private investment, causing the growth rate to be low.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21319.

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    Date of creation: 01 Nov 2008
    Date of revision: 11 Mar 2010
    Handle: RePEc:pra:mprapa:21319

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    Related research

    Keywords: Corruption; Endogenous Growth; Public Investment; Ramsey Taxation.;

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    References

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    1. M. Emranul Haque & Richard Kneller, 2008. "Public Investment and Growth: The Role of Corruption," Centre for Growth and Business Cycle Research Discussion Paper Series, Economics, The Univeristy of Manchester 98, Economics, The Univeristy of Manchester.
    2. Barro, Robert J & Sala-i-Martin, Xavier, 1992. "Public Finance in Models of Economic Growth," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(4), pages 645-61, October.
    3. Paolo Mauro, 2004. "The Persistence of Corruption and Slow Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 51(1), pages 1.
    4. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages S103-26, October.
    5. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(2-3), pages 313-344, April.
    6. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(3), pages 681-712, August.
    7. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
    8. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 23(2), pages 177-200, March.
    9. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 95(4), pages 607-25, December.
    10. Marina Azzimonti-Renzo & Pierre-Daniel G. Sarte & Jorge Soares, 2003. "Optimal public investment with and without government commitment," Working Paper, Federal Reserve Bank of Richmond 03-10, Federal Reserve Bank of Richmond.
    11. William Easterly & Sergio Rebelo, 1993. "Fiscal Policy and Economic Growth: An Empirical Investigation," NBER Working Papers 4499, National Bureau of Economic Research, Inc.
    12. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(3), pages 485-517, June.
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    Cited by:
    1. Jan HANOUSEK & Evžen KOČENDA, 2010. "Public investment and fiscal performance in new EU member states," Departmental Working Papers, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano 2010-07, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    2. Jan Hanousek & Evžen Kočenda, 2011. "Public Investment and Fiscal Performance in the New EU Member States," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 32(1), pages 43-71, 03.

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