Public Investment and Corruption in an Endogenous Growth Model
AbstractHigh 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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 21319.
Date of creation: 01 Nov 2008
Date of revision: 11 Mar 2010
Corruption; Endogenous Growth; Public Investment; Ramsey Taxation.;
Find related papers by JEL classification:
- D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H0 - Public Economics - - General
- O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
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