Essays on the Theory of Productive Government Activity and Economic Growth

This dissertation contributes to the theoretical understanding of the determinants and consequences of productive government activity for the economic performance of a country’s economy. Chapter 2 gives a comprehensive survey of the recent theoretical literature on the link between productive government expenditure and long-run economic growth. Based on the seminal contribution of Barro (1990), it develops a uniform analytical framework in which most of the contributions can be studied and directly compared. In this framework the services derived from productive government activity directly enter the production function of private firms.Chapter 3 studies the interaction between the enforcement of the rule of law, innovation investments, and economic growth in an endogenous growth framework with an expanding set of product varieties. Under a weak rule of law, producing firms’ property rights over profits are not fully secured. It results that a minimum strength of the rule of law is a necessary condition for sustained economic growth. However, a weak rule of law may be Pareto-improving. A government investing resources in the improvement of the rule of law may be able to shift the economy from a no-growth trap onto a path with strictly positive growth, but in terms of welfare no growth might be preferable. Chapters 4 and 5 analyze how population aging affects taxes, the level and composition of government spending, and long-run economic growth when government policy is determined endogenously via a democratic voting process. The focus is on two public spending categories: productive government expenditure that increases private production possibilities and public consumption spending (e.g. on health and care services) that satisfies the preferences of the elderly. Population aging shifts political power from the young to the old. While this does not affect public productive expenditure, it tends to increase public spending on the elderly and the overall tax burden. The latter lowers the economy’s growth rate. However, the overall effect on economic growth can be positive because population aging reduces the effect of capital dilution and increases the incentives to save for old age.