Infrastructure Investment and Maintenance Expenditure: Optimal Allocation Rules in a Growing Economy

This paper studies the allocation of public expenditure between infrastructure investment and maintenance in an endogenous growth framework. In the basic model maintenance affects both the durability and efficiency of public capital. The balanced growth path is derived and transitional dynamics associated with a revenue-neutral increase in spending on maintenance are analyzed. The growth-maximizing tax rate and share of infrastructure investment are then obtained. The model is then extended to account for the possibility that public spending on maintenance affects also the durability of private capital. Implications for optimal policies are also analyzed.