Fiscal Policy and Endogenous Growth with Public Infrastructure

Optimal tax and spending allocation rules are derived in an endogenous growth model in which raw labor must be educated to become productive and infrastructure services affect the schooling technology. The optimal tax rate is found to depend only on the elasticities of output with respect to infrastructure services and educated labor. The optimal share of spending on infrastructure (relative to education) depends also on these elasticities, as well as the quality of schooling and the degree to which infrastructure services affect the production of educated labor. Congestion costs in education tend to raise the optimal share of spending on infrastructure.