The inefficiency of firm-augmenting public inputVersus the inapplicability of provision rules

Abstract

This paper contributes to the debate about the appropriate efficiency rule for the provision of a firm-augmenting public input. This debate is caused by the dissatisfaction of Kaizuka-rule, i.e. a Samuelson-type condition for public inputs, in the long run. Therefore the applicability of Kaizuka-rule has been questioned. By developing an alternative efficiency rule this paper shows that firm-augmenting public input cannot be provided efficiently. The latter is due to the goods’ properties of firm-augmenting public input along with the assumption of firm-augmenting public input as an intermediate good a long term efficient equilibrium is excluded a priori. Consequently firm- augementing public input is unsuited for depicting public intermediate goods in economic models. Thus models, which use firm-augmenting public input, such as that of fiscal competition and of endogenous growth, should be reconsidered.