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Chandril Bhattacharyya
''A note on endogenous growth with public capital''
( 2016, Vol. 36 No.4 )
This paper develops a two sector model of endogenous economic growth with public capital where private goods and public investment goods are produced with different production technologies. The government buys public investment goods produced by private producers; and the government is a monopsonist in this market to determine the price. The price of public investment good and the income tax rate are not two independent policy instruments for the government; and the government maximises its objective function with respect to one of them and can set the other to balance the budget. When growth rate is maximised in the steady state equilibrium, the corresponding income tax rate is equal to the elasticity of private good's output with respect to public capital but it is independent of the technology in public good production. The welfare maximising solution is not necessarily identical to the growth rate maximising solution even in the steady state equilibrium.
Keywords: Income taxation, Price of public investment good, Endogenous growth, Steady-state equilibrium, Public capital
JEL: H4 - Publicly Provided Goods: General
O4 - Economic Growth and Aggregate Productivity: General
Manuscript Received : Apr 06 2016 Manuscript Accepted : Dec 21 2016

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