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Technological change and the decline of public investment

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Abstract

Over the past 40 years public investment has declined in most developed countries. This paper argues that such pattern can be the consequence of investment-specific technological progress. Public investment, mostly on infrastructures, experienced a slower rate of innovation than private investment, composed primarily by equipment and software. Within a simple neoclassical growth model with a public sector, we show that such type of technological progress reduces the incentives to invest in public capital, and accounts for 80 percent of the observed decline. The implied co-movements of other fiscal instruments are also consistent with observed trends.

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  • Davide Debortoli & Pedro Gomes, 2014. "Technological change and the decline of public investment," Economics Working Papers 1685, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:1685
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    More about this item

    Keywords

    Public Investment; investment-specific technological change; public capital; profit tax; labor tax;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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