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Public infrastructure, non cooperative investments and endogeneous growth

Author

Listed:
  • Charles Figuières
  • Fabien Prieur
  • Mabel Tidball

Abstract

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.

Suggested Citation

  • Charles Figuières & Fabien Prieur & Mabel Tidball, 2007. "Public infrastructure, non cooperative investments and endogeneous growth," Working Papers 07-05, LAMETA, Universtiy of Montpellier, revised Jan 2012.
  • Handle: RePEc:lam:wpaper:07-05
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    File URL: http://www.lameta.univ-montp1.fr/Documents/DR2007-05.pdf
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    References listed on IDEAS

    as
    1. Datta, Manjira & Mirman, Leonard J, 2000. "Dynamic Externalities and Policy Coordination," Review of International Economics, Wiley Blackwell, vol. 8(1), pages 44-59, February.
    2. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    3. Gramlich, Edward M, 1994. "Infrastructure Investment: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 32(3), pages 1176-1196, 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.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Akihiko Yanase & Makoto Tawada, 2017. "Public infrastructure for production and international trade in a small open economy: a dynamic analysis," Journal of Economics, Springer, vol. 121(1), pages 51-73, May.
    2. Soldatos, Gerasimos T., 2014. "Local Taxation, Private-Public Consumption Complementarity, and the Optimal Number of Jurisdictions," MPRA Paper 60861, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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