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Factor substitution is an engine of growth in a model with productive public expenditure

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  • Manuel Gómez

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Abstract

This paper examines the effect of the elasticity of substitution between public and private inputs on the optimal fiscal policy, long-run growth and welfare. To this end, we consider an endogenous growth model with productive public spending. If the baseline government size is suboptimally low (high), the higher the elasticity of substitution the higher (lower) are the optimal government size and, in the presence of congestion, the optimal income tax. In any case, the higher the elasticity of substitution the higher are the optimal long-run growth rate and welfare. Copyright Springer-Verlag Wien 2016

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  • Manuel Gómez, 2016. "Factor substitution is an engine of growth in a model with productive public expenditure," Journal of Economics, Springer, vol. 117(1), pages 37-48, January.
  • Handle: RePEc:kap:jeczfn:v:117:y:2016:i:1:p:37-48
    DOI: 10.1007/s00712-015-0442-8
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    References listed on IDEAS

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    More about this item

    Keywords

    Elasticity of substitution; Productive public spending; Endogenous growth; Welfare; H21; O41;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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