Infrastructure, Public Education and Growth with Congestion Costs

This paper studies the optimal allocation of public expenditure between infrastructure and education services in an endogenous growth framework. Raw labor must be educated to become productive. The balanced-growth path is derived and the transitional dynamics associated with an increase in the share of spending on infrastructure are characterized. The growth-maximizing share is shown to depend on the elasticities of output with respect to both infrastructure services and the supply of educated labor. If the supply of raw labor is increasing in wages, the growth-maximizing share of government spending on infrastructure depends negatively on the degree of congestion in schooling.