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Governmental activity and private capital adjustment

Listed author(s):
  • Ingrid Ott

    ()

    (Institute of Economics, University of Lüneburg)

  • Susanne Soretz

    ()

    (Department Growth and Distribution, University of Hanover)

We analyze within a dynamic model how firms decide on capital investment if the accompanying adjustment costs are a function of governmental activity. The government provides a public input and decides on the degree of rivalry. The productive public input enhances private capital productivity and reduces adjustment costs. We derive the equilibrium in which capital and investment ratio are both constant, carry out comparative dynamic analysis and discuss the model's policy implications. Increasing the amount of the public input unequivocally spurs capital investment whereas the result becomes ambiguous with respect to the impact of rivalry. Since a reduction in congestion increases the individually available amount of the public input, crowding out effects may lead to a reduction in the equilibrium capital stock. Most of the analysis is conducted for general production functions, although the case of CES technology is also considered.

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Paper provided by University of Lüneburg, Institute of Economics in its series Working Paper Series in Economics with number 26.

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Length: 27 pages
Date of creation: 13 Mar 2006
Handle: RePEc:lue:wpaper:26
Contact details of provider: Web page: http://leuphana.de/institute/ivwl.html

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  1. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  2. Julia K. Thomas, "undated". "Is Lumpy Investment Relevant for the Business Cycle?," GSIA Working Papers 1998-E250, Carnegie Mellon University, Tepper School of Business.
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