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Human and physical capital: Welfare and income effects of government spending

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  • Kumar, Alok

Abstract

Insufficient physical and human capital are major impediments to development and poverty reduction in low-income countries. Given the financial constraint, should the governments emphasize physical capital or human capital investment and what instruments should they use? This paper addresses these questions using a dynamic stochastic general equilibrium model with human capital and two-sectors: formal and informal. The model is estimated using data from India. Results demonstrate that investment subsidy is the most effective instrument in raising the GDP and aggregate welfare followed by government physical capital investment. However, both these policies mainly benefit the rich. The government investment in schooling and tuition subsidies targeted at poor are the most effective instruments for raising the employment income and welfare of poor. Using government physical capital investment in combination with either government schooling investment or tuition subsidy targeted at poor, the government can raise the GDP and income and welfare of both rich and poor.

Suggested Citation

  • Kumar, Alok, 2026. "Human and physical capital: Welfare and income effects of government spending," Journal of Macroeconomics, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:jmacro:v:87:y:2026:i:c:s0164070425000734
    DOI: 10.1016/j.jmacro.2025.103737
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    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • I25 - Health, Education, and Welfare - - Education - - - Education and Economic Development
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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