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The Quality of Public Investment

  • Chakraborty Shankha

    ()

    (University of Oregon)

  • Dabla-Norris Era

    ()

    (International Monetary Fund)

Macro-level estimates of the productivity of public capital are typically larger than micro-level estimates. The evidence also shows sizable cross-country differences in the quality of public capital. A general equilibrium growth model is introduced to explain both facts. The productivity of firms specializing in differentiated intermediate inputs depends on public capital whose provision is subject to bureaucratic corruption. Higher corruption lowers the quality of public capital and discourages specialization as well as development. Persistent difference in this quality results from multiple equilibrium levels of corruption. Simple calculations show that (i) relatively small micro-level productivity effects of public capital generate large macro-level effects, and (ii) quality differences in public capital can potentially explain a large fraction of the income gap between rich and poor nations.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 11 (2011)
Issue (Month): 1 (August)
Pages: 1-29

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Handle: RePEc:bpj:bejmac:v:11:y:2011:i:1:n:27
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