Public Consumption and Public Infrastructure in a Dynamic Economy

Abstract

We study the politico-economic equilibrium of a parametric version of the neoclassical growth model, uncovering the link between economic fundamentals, and (i) the level of government, and also (ii) the composition of government spending between public consumption and public infrastructure. Public consumption goods enter the utility function of households and public infrastructure enhances the productivity of the private sector. Government spending is financed via marginal income taxes and households vote over both the level of government and its composition. Voters partly internalize the tax wedges on capital accumulation and also the benefits of public infrastructure, so higher capital intensity and more patience of households lead to less government, a more productive composition of fiscal spending and higher steady state capital and income level. We compare our policies with these of a static framework and also with the dynamically efficient policies.