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Public capital and distributional dynamics in a two-sector growth model

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  • Getachew, Yoseph Yilma

Abstract

This paper mainly develops a joint theory of public capital, inequality, and growth, in a two-sector growth model that yields complete analytical solutions. Public capital plays an important role in long-run growth through enhancing productivity and complementing the accumulation of private inputs. Under certain conditions, it could also have important implications for income inequality dynamics. Inequality is bad for growth, when the credit market is imperfect and there is a diminishing marginal rate of return on private investment. Certain public services and investment may benefit the poor more than proportionally and thus improve the distribution of income, and hence, improve economic growth through an indirect channel. The key mechanism linking the distribution of income to public capital is its disproportional effect on the economy that affects factor shares of capital. The paper also studies the determination of optimal tax.

Suggested Citation

  • Getachew, Yoseph Yilma, 2010. "Public capital and distributional dynamics in a two-sector growth model," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 606-616, June.
  • Handle: RePEc:eee:jmacro:v:32:y:2010:i:2:p:606-616
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    Cited by:

    1. Kose,Ayhan & Ohnsorge,Franziska Lieselotte & Ye,Lei Sandy & Islamaj,Ergys, 2017. "Weakness in investment growth : causes, implications and policy responses," Policy Research Working Paper Series 7990, The World Bank.
    2. Getachew, Yoseph Yilma, 2012. "Distributional effects of public policy choices," Economics Letters, Elsevier, vol. 115(1), pages 56-59.
    3. Parantap Basu & Yoseph Getachew, 2017. "Redistributive Innovation Policy, Inequality and Efficiency," CEGAP Working Papers 2017_02, Durham University Business School.
    4. Basu, Parantap & Getachew, Yoseph, 2015. "An adjustment cost model of social mobility," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 177-190.
    5. World Bank Group, 2017. "Global Economic Prospects, January 2017," World Bank Publications, The World Bank, number 25823.
    6. Getachew, Yoseph Y. & Turnovsky, Stephen J., 2015. "Productive government spending and its consequences for the growth–inequality tradeoff," Research in Economics, Elsevier, vol. 69(4), pages 621-640.
    7. Getachew, Yoseph Yilma, 2016. "Credit constraints, growth and inequality dynamics," Economic Modelling, Elsevier, vol. 54(C), pages 364-376.
    8. Chatterjee, Santanu & Turnovsky, Stephen J., 2012. "Infrastructure and inequality," European Economic Review, Elsevier, vol. 56(8), pages 1730-1745.

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