A Note on Endogenous Growth with Public Capital

This paper develops a two sector model of endogenous economic growth with public capital where private goods and public investment goods are produced with different production technologies. The government buys public investment goods produced by private producers; and the government is a monopsonist in this market. We analyse properties of growth rate maximizing and welfare maximising fiscal policies in the steady state equilibrium. It is shown that the government cannot (can) control the production of public investment good changing the income tax rate (price of public investment good). The growth rate maximizing price of the public investment good is not necessarily equal to its competitive price. However, growth rate maximising income tax rate is equal to the elasticity of private good’s output with respect to public capital but is independent of technology in public good production. Welfare maximising solution is not necessarily identical to the growth rate maximising solution even in the steady state equilibrium.