Tarhan, Simge (2008): Public Investment and Corruption in an Endogenous Growth Model.
Download (371kB) | Preview
High capital spending is favored by economists and politicians for its beneficial effects on economic growth. However, there is empirical research associating high levels of public investment with low economic growth due to corruption. I provide an endogenous growth model with Ramsey taxation that is consistent with this empirical finding. In the model, government maximizes the weighted average of consumers' utility and its own utility coming from expropriation of tax revenues. The weight determines the benevolence of the government. I show that a self-interested government sets a higher public-to-private-capital ratio than a benevolent one, reducing the productivity of public capital, in order to use more of the tax revenues for its own consumption. While a large public-to-private capital ratio increases the productivity of private investment, high taxes that come along with high public capital spending reduce the after-tax returns to private investment, causing the growth rate to be low.
|Item Type:||MPRA Paper|
|Original Title:||Public Investment and Corruption in an Endogenous Growth Model|
|Keywords:||Corruption, Endogenous Growth, Public Investment, Ramsey Taxation.|
|Subjects:||D - Microeconomics > D7 - Analysis of Collective Decision-Making > D73 - Bureaucracy; Administrative Processes in Public Organizations; Corruption
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy
H - Public Economics > H0 - General
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity
|Depositing User:||Simge Tarhan|
|Date Deposited:||08. Dec 2010 01:30|
|Last Modified:||12. Feb 2013 20:36|
Aschauer, D. A. (1989): “Is Public Expenditure Productive?,” Journal of Monetary Economics, 23, 177-200.
Azzimonti-Renzo, M., P.-D. G. Sarte, and J. Soares (2003): “Optimal public investment with and without government commitment,” Working Paper 03-10, Federal Reserve Bank of Richmond.
Barro, R. J. (1990): “Government Spending in a Simple Model of Endogenous Growth,” Journal of Political Economy, 98, S103-S125.
Barro, R. J., and X. Sala-i Martin (1992): “Public Finance in Models of Economic Growth,” Review of Economic Studies, 59(4), 645-661.
Chari, V., and P. J. Kehoe (1999): “Optimal fiscal and monetary policy," vol. 1 of Handbook of Macroeconomics, chap. 26, pp. 1671-1745. Elsevier.
Devarajan, S., V. Swaroop, and H.-F. Zou (1996): “The composition of public expenditure and economic growth,” Journal of Monetary Economics, 37(2-3), 313-344.
Easterly, W., and S. Rebelo (1993): “Fiscal Policy and Economic Growth,” Journal of Monetary Economics, 32, 417-458.
Futagami, K., Y. Morita, and A. Shibata (1993): “Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, 95(4), 607-625.
Haque, M. E., and R. Kneller (2008): “Public Investment and Growth: The Role of Corruption,” Centre for Growth and Business Cycle Research Discussion Paper Series 98, Economics, The University of Manchester.
Heston, A., R. Summers, and B. Aten (2006): Penn World Table Version 6.2 Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania.
Jones, L. E., R. E. Manuelli, and P. E. Rossi (1993): “Optimal Taxation in Models of Endogenous Growth,” Journal of Political Economy, 101(3), 485-517.
Keefer, P., and S. Knack (2007): “Boondoggles, Rent-Seeking, and Political Checks and Balances: Public Investment under Unaccountable Governments,” The Review of Economics and Statistics, 89(3), 566-572.
Mauro, P. (1995): “Corruption and Growth,” The Quarterly Journal of Economics, 110(3), 681-712.
Mauro, P. (1997): “The Effects of Corruption on Growth, Investment, and Government Expenditure,” in Corruption and the Global Economy, ed. by K. A. Elliott. Institute of International Economics, Washington D.C.
Mauro, P. (2004): “The Persistence of Corruption and Slow Economic Growth,” IMF Staff Papers, 51(1).
Tanzi, V., and H. R. Davoodi (1997): “Corruption, Public Investment, and Growth,” IMF Working Papers 97/139, International Monetary Fund.
Available Versions of this Item
Public Investment and Corruption in an Endogenous Growth Model. (deposited 12. Mar 2010 14:41)
- Public Investment and Corruption in an Endogenous Growth Model. (deposited 08. Dec 2010 01:30) [Currently Displayed]