Government expenditure, capital adjustment, and economic growth
We analyze within a dynamic model the growth impact of private capital investment if the accompanying adjustment costs are a function of governmental activity. The impact of the productive public input is twofold: it (i) enhances private capital productivity and (ii) reduces adjustment costs. We derive the equilibrium in which the investment ratio is constant and determine the equilibrium growth rate. Carrying out comparative dynamic analysis allows us to show that better infrastructure endowment unequivocally spurs the equilibrium growth rate whereas the result becomes ambiguous with respect to the impact of rivalry. Since a reduction in congestion lowers the individually perceived capital productivity such a policy may reduce the equilibrium growth rate. While it is not possible to find closed solutions of the model we simulate the growth rate for different parameter constellations
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