Open AccessPublic Spending in a Model of Endogenous Growth with Habit Formation
Author(s) -
Manuel A. Gómez
Publication year - 2010
Publication title -
discrete dynamics in nature and society
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.264
H-Index - 39
eISSN - 1607-887X
pISSN - 1026-0226
DOI - 10.1155/2010/514329
Subject(s) - economics , endogenous growth theory , elasticity of substitution , habit , government spending , welfare , microeconomics , separable space , growth model , public expenditure , outcome (game theory) , optimal tax , public economics , public finance , production (economics) , macroeconomics , mathematics , market economy , mathematical analysis , psychotherapist , human capital , psychology
This paper introduces habit-forming preferences in a Barro-type endogenous growth model with productive public services. Governmentexpenditure, which may be subject to congestion, is financed by distortionary income taxation. Different from the standard time-separable model,the presence of habits makes the economy feature transitional dynamics, which are solved in closed form. Setting the income tax so as to equatethe elasticity of public services in production is shown to maximize both long-run growth and welfare as in the standard model. This second-best solution coincides with the first-best outcome only in the presence of proportional congestion
Accelerating Research
Robert Robinson Avenue,
Oxford Science Park, Oxford
OX4 4GP, United Kingdom
Address
John Eccles HouseRobert Robinson Avenue,
Oxford Science Park, Oxford
OX4 4GP, United Kingdom