Public Investment Policy, Distribution, and Growth: What Levels of Redistribution through Public Investment Maximize Growth?

This paper studies the distributional and the growth effects of public investment in a simple growth model with incomplete market where both growth and inequality are endogenously determined. Taxation lowers growth through distorting private investment, whereas public investment stimulates long run growth. Higher inequality corresponds to lower growth when the credit and insurance markets are missing as these prevent the efficient amount of investment to be undertaken in the economy. In this case, public investment may have additional efficiency benefit through substituting for the missing markets. It serves as means to relax resource constraints that impede certain investment. The efficiency effect of complementary public investment, on the other hand, is compromised as it aggravates it.