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Public Policy and Economic Growth: Developing Neoclassical Implications

  • King, Robert G
  • Rebelo, Sergio

Why do the countries of the world display considerable disparity in long-term growth rates? This paper examines the hypothesis that the answer lies in differences in national public policies that affect the incentives that individuals have to accumulate capital in both its physical and human forms. The authors' analysis of a calibrated two-sector endogenous growth model shows that the incentive effects of taxation can induce large differences in long-run growth rates. This influence of taxation on the rate of economic growth has important welfare implications: in basic endogenous growth models, the welfare cost of a 10 percent increase in the rate of income tax can be forty times larger than in the basic neoclassical model. Copyright 1990 by University of Chicago Press.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 98 (1990)
Issue (Month): 5 (October)
Pages: S126-50

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Handle: RePEc:ucp:jpolec:v:98:y:1990:i:5:p:s126-50
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  1. Robert G. King & Sergio T. Rebelo, 1989. "Transitional Dynamics and Economic Growth in the Neoclassical Model," NBER Working Papers 3185, National Bureau of Economic Research, Inc.
  2. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 65-94.
  3. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  4. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  5. Lucas, Robert E, Jr, 1980. "Methods and Problems in Business Cycle Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 696-715, November.
  6. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  7. Summers, Robert & Heston, Alan, 1984. "Improved International Comparisons of Real Product and Its Composition: 1950-1980," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 30(2), pages 207-62, June.
  8. J. A. Mirrlees, 1969. "The Dynamic Nonsubstitution Theorem," Review of Economic Studies, Oxford University Press, vol. 36(1), pages 67-76.
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