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Public Investment and Corruption in an Endogenous Growth Model

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  • Tarhan, Simge

Abstract

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.

Suggested Citation

  • Tarhan, Simge, 2008. "Public Investment and Corruption in an Endogenous Growth Model," MPRA Paper 21319, University Library of Munich, Germany, revised 11 Mar 2010.
    • Handle: RePEc:pra:mprapa:21319
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    References listed on IDEAS

    as
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    4. M. Emranul Haque & Richard 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.
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    6. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
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    9. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
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    12. Mr. Paolo Mauro, 1996. "The Effects of Corruption on Growth, Investment, and Government Expenditure," IMF Working Papers 1996/098, International Monetary Fund.
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    Cited by:

    1. Jan Hanousek & Evžen Kočenda, 2011. "Public Investment and Fiscal Performance in the New EU Member States," Fiscal Studies, Institute for Fiscal Studies, vol. 32(1), pages 43-71, March.

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    More about this item

    Keywords

    Corruption; Endogenous Growth; Public Investment; Ramsey Taxation.;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H0 - Public Economics - - General
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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