Series: Working Papers. 9501.
Author: Jorge Blázquez and Miguel Sebastián
Quantitative methods
- Economic situation
- Productivity
- General government
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Abstract
The literature on public investment highlights the relationship between public capital and total output, estimating aggregate production functions. Such a procedure biases the positive effect of public capital by ignoring the financial constraint, and thus, the required resource reallocation.We consider both the production externality and the government budget constraint. This allows us to solve for the optimal stock of public capital. We show that technological criteria may lead to an oversized public capital stock, and for a specific range of technological parameters, it occurs even when a crowding-in effect takes place.