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Long-run growth and welfare in a two sector endogenous growth model with productive and non-productive government expenditure

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  • Escobar-Posada, Rolando A.
  • Monteiro, Goncalo

Abstract

We develop a two-sector model of physical and human capital accumulation, where public goods provide both productive capital (i.e. infrastructures) and utility enhancing services. We analyze the impact of both the level of government expenditure and its composition on growth and welfare, under different production technologies, and derive their respective growth and welfare-maximizing levels. We show that contrary to what happens with welfare, the long-run growth rate is increasing in the intertemporal elasticity of substitution but decreasing in the relative weight of public goods in utility. Furthermore, the welfare-maximizing tax rate is lower than the growth-maximizing tax rate, whereas the welfare maximizing share of productive government expenditure is greater than the growth maximizing share. Finally, we employ numerical simulations to get a better understanding of the model.

Suggested Citation

  • Escobar-Posada, Rolando A. & Monteiro, Goncalo, 2015. "Long-run growth and welfare in a two sector endogenous growth model with productive and non-productive government expenditure," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 218-234.
  • Handle: RePEc:eee:jmacro:v:46:y:2015:i:c:p:218-234
    DOI: 10.1016/j.jmacro.2015.09.008
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    Keywords

    Infrastructure; Education; Utility enhancing public goods; Economic growth; Welfare;

    JEL classification:

    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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