On Growth and Infrastructure Provision

Abstract

Investment decisions are usually affected by what firms perceive as government supply constraints: when a firm considers whether to increase its capital stock it takes into account possible constraints due to the lack of public productive services. Introducing this consideration in a simple growth model with public services subject to congestion, I derive the possibility of low development traps for economies which start with a low level of private capital stock. At the same time, multiple equilibria, that is different long-run outcomes consistent with the same fundamentals, arise. Under some circumstances, an increase of the flow of public productive services could drive away the economy from the poverty trap. For growing economies, growth rate is positively related to the share of public spending on productive services. Empirical evidence at country level accords with implications of the model.

JEL Classification: O11, O23, O41