Influence of Inefficiency in Government Expenditure on the Multiplier of Public Investment

Abstract

The multiplier of public investment has been expected to far exceed 1, owing to the indirect influence of public spending. However, it has been reported that actual multipliers for a real economy are sometimes <1; the reason for this has not been adequately explained in the literature. This study analyzes the influence of inefficient public expenditure on gross domestic product, using both an agent-based model and a theoretical derivation of the equation for the multiplier of public investment, the latter of which is based on our revised version of Morishima’s economic linkage table. The use of both of these instruments indicates that gross domestic product decreases with an increase in the inefficiency of public expenditure, which is defined as the ratio of firm subsidies to the government’s total expenditure. The multiplier of public investment becomes <1 when the degree of inefficiency is sufficiently large, and the ratio of the firm’s investment spending to the total amount of subsidy funding is sufficiently small. A multiplier lower than 1 is thought to appear when the degree of inefficiency in public expenditure is sufficiently large and firms are reluctant to invest; much of the surplus amount of subsidized funds can be deposited into a bank account, thus reducing the money stock in the market.