Schooling and Public Capital in a Model of Endogenous Growth

This paper studies the allocation of public spending between edu-cation services and infrastructure investment in an endogenous growth model where public capital in infrastructure affects the process of hu-man capital accumulation. The balanced growth path is derived and the dynamics associated with a budget-neutral reallocation of spend-ing from education to infrastructure are studied through numerical simulations. The growth-maximizing tax rate is shown to depend only on the production technology (as in standard flow models of public expenditure), whereas the optimal share of infrastructure investment depends also on the “productiveness ” of infrastructure (relative to education services) in the schooling technology. JEL Classification Numbers: H54, I28, O41. ∗I am grateful to Nihal Bayraktar for assistance in preparing the numerical simulations reported in this paper, and to Kyriakos Neanidis for helpful discussions and comments