Public Capital Maintenance and Congestion: Long-Run Growth and Fiscal Policies

Abstract

In this paper we study the equilibrium properties of an endogenous growth model, in which public maintenance expenditures affect the depreciation rate of public capital and the latter is subject to congestion. A rise in 'new' public investment and output also raises the public capital depreciation rate and reduces public capital accumulation due to increased public capital usage. We then point out a mechanism under which thresholds of policy variables for economic growth arise and we find that economies with low congestion in public infrastructure, in which the rise in output is high, will require a threshold level of public capital maintenance for ongoing growth. We also examine the fiscal implications of public capital maintenance policies and we find that the composition of public capital expenditures under congestion is a crucial determinant of optimal and growth-maximizing fiscal policies. The government can affect the return of public capital by re-allocating public expenditures between 'new' public investment and maintenance and hence avoid excessive taxation that is required under increasing congestion.