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Public infrastructure, non cooperative investments and endogeneous growth

  • Charles Figuières
  • Fabien Prieur
  • Mabel Tidball

This paper develops a two-country general equilibrium model with endogenous growth where governements behave strategically in the provision of productive infrastructure. The public capitals enter both national and foreign production as an external input, and they are financed by a flat tax on income. In the private sector, firms and households take the public policy as given when making their decisions. It is shown that both a Markov Perfect Equillibrium (MPE) and a Centralized Solution (CS) exist, even when the parameters allow for endogenous growth, therefore explosive paths for the state variables. And the dynamic analysis reveals three important features. Firstly, under constant returns, the two countries' growth rates differ during the transition but are identical on the balanced growth path. Secondly, due to the infrastructure externality, assuming away constant returns to scale a country with decreasing returns can experience sustained growth provided that the other grows at a positive constant rate. Thirdly, Nash growth rates are compared with the centralized rates. We show that cooperation in infrastructure provision does not necessarily lead to higher growth for each country. We also show that, in some configurations of households' preferences and initial conditions, cooperation would call for a recession in the initial stages of development, whereas strategic investments would not. Lastly, depending also on the configuration of preferences, we show that cooperation can increase or decrease the gap between countries' growth rates.

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File URL: http://www.lameta.univ-montp1.fr/Documents/DR2007-05.pdf
File Function: First version, 2007
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Paper provided by LAMETA, Universtiy of Montpellier in its series Working Papers with number 07-05.

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Length: 34 pages
Date of creation: May 2007
Date of revision: Jan 2012
Handle: RePEc:lam:wpaper:07-05
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Web page: http://www.lameta.univ-montp1.fr/

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  1. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  2. Manjira Datta & Leonard J. Mirman, . "Dynamic Externalities and Policy Coordination," Working Papers 97/11, Arizona State University, Department of Economics.
  3. Gramlich, Edward M, 1994. "Infrastructure Investment: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 32(3), pages 1176-96, September.
  4. Aschauer, David Alan, 1989. "Does public capital crowd out private capital?," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 171-188, September.
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