Modelling Social Infrastructure and Economic Growth

This paper develops a growth model with a public sector and a human capital sector to explore the impact of social infrastructure on investment in physical capital, the accumulation of skills, output, and consumption. We show that the implications of the model are consistent with the empirical observations of Hall and Jones (1999). Economies where government policies and institutions encourage production over diversion have a larger ‘stock’ of social infrastructure, conditional on population size and sophistication of diversion technologies, which raises output per worker by increasing the extent of participation in market, rather than diversive, activities. The magnitude of these effects depends on economic agents’ inherent propensity for rent‐seeking. In addition, economies with unstable governments may suffer from an under‐provision of social infrastructure and, consequently, have reduced levels of capital and output per worker.