Public investment criterion with distorted capital markets in an overlapping generations economy

Abstract

This study extends Arrow's (1982) analysis on the public investment criterion with tax-distorted capital markets by using an overlapping generations model. Public investment increases the productivities of both private capital and labor. The latter goes to the working generation, while the former goes to the retired generation. In this sense public investment has the intergenerational distribution effect, which is asserted to be reflected in the opportunity cost and the discount rate for public investment.