The dynamic analysis of maintenance policy in a growing economy with public capital

This paper sets up a one-sector endogenous growth model to evaluate the impact of maintenance policy on a decentralized economy. It analyzes how the maintenance policy and the nonlinear and endogenous depreciation of private capital facilitate the household’s optimistic expectation to realize. It is shown that the role of the accelerated depreciation of private capital is the key to generate local indeterminacy regardless of the tax financing regime. These theoretical findings with respect to the linkage between local indeterminacy and public maintenance are not common in the existing literature. In addition, our findings also have some important policy implications. The public sector should prudently assess the situations of private capital depreciation to reduce the occurrence of local indeterminacy while adopting the maintenance policy.