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Public Investment, Distributive Politics and Economic Growth

Listed author(s):
  • Francisca Guedes de Oliveira


    (Universidade Católica Portuguesa - Porto)

This paper develops on a Solow type of model where the government is introduced as a decision maker. Additionally, this paper introduces consumer decisions and assumes that individuals can be differentiated by their relative factor endowment (labor and private capital). The results indicate that the economy’s growth rate has an inverted U-shape relationship with the tax rate on private capital. They also indicate that the tax rate has a positive relation with the amount of money government spend on consumption (rather than on investment in public capital). The paper also concludes that the choice of the tax rate will be above the optimal level and hence the potential growth rate will not be achieved. Taking the analysis further, it can be assumed that voters will try to correct lower tax rates of public investment by choosing an higher tax rate. This tax rate will be higher if society is more disparate in terms of income distribution. Finally, the conclusion from a public policy perspective is that there is a negative relationship between the chosen tax rate and public investment and that this relationship is highly sensitive to the model parameters.

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Paper provided by Católica Porto Business School, Universidade Católica Portuguesa in its series Working Papers de Economia (Economics Working Papers) with number 19.

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Length: 38 pages
Date of creation: Nov 2007
Handle: RePEc:cap:wpaper:192007
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