Abstract
This paper extends the Sandmo-Dreze model of public investment to the overlapping generations model, where each person lives for two periods, working in the first and retired in the second. It is shown that in a (non-) tax-distorted economy with (without) the corporation income tax, if government surplus can be redistributed between younger and older generations, then the second-best (optimal) discount rate for public investment in steady states should be not only the weighted average formula (the market rate of interest) derived by Sandmo and Dreze (Economica, 1971) but also the population growth rate.
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