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A Two-Sector Model of Public Investment and Growth

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  • Giulia Felice

Abstract

We consider a two-sector economy, where public infrastructure unevenly affects the productivity of the sectors. Private and public capital are produced with different technologies, and the sector producing the infrastructure is not benefiting from its services. The government provides both infrastructure investment and a flow of intermediate goods, enhancing the productivity of the sector producing the infrastructure. We show that this economy displays perpetual growth whenever the share of public expenditure on intermediate goods is higher than that on infrastructure. In the long run the public capital, the private capital and the GDP grow at the same steady rate and the share of total public expenditure on GDP is constant. We study numerically the transition to the long run, along which the structural adjustements take place. We single out the conditions under which the tax rate is growth maximizing.

Suggested Citation

  • Giulia Felice, 2010. "A Two-Sector Model of Public Investment and Growth," DEGIT Conference Papers c015_060, DEGIT, Dynamics, Economic Growth, and International Trade.
    • Handle: RePEc:deg:conpap:c015_060
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    File URL: http://degit.sam.sdu.dk/papers/degit_15/c015_060.pdf
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    More about this item

    Keywords

    Structural Change; Transition; Public Investments; Growth;
    All these keywords.

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • P20 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - General
    • H5 - Public Economics - - National Government Expenditures and Related Policies

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