Government Spending in a Simple Model of Endogeneous Growth

TLDR

Endogenous‑growth models often assume constant returns to a broad notion of capital. The study extends these models by incorporating tax‑financed government services that influence production or utility. The authors extend the models by adding tax‑financed government services that affect production or utility. The model predicts that utility‑type government spending reduces growth and saving rates, while productive spending initially raises them before falling, and that income‑taxed decentralized.

Abstract

One strand of endogenous-growth models assumes constant returns to a broad concept of capital. I extend these models to include tax-financed government services that affect production or utility. Growth and saving rates fall with an increase in utility-type expenditures; the two rates rise initially with productive government expenditures but subsequently decline. With an income tax, the decentralized choices of growth and saving are "too low," but if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency. Empirical evidence across countries supports some of the hypotheses about government and growth.