Policy and Endogenous Growth with Public Infrastructure,” Working Paper No

Optimal tax and spending allocation rules are derived in an en-dogenous growth model in which raw labor must be educated to be-come productive and infrastructure services affect the schooling tech-nology. The optimal tax rate is found to depend only on the elasticities of output with respect to infrastructure services and educated labor. The optimal share of spending on infrastructure (relative to education) depends also on these elasticities, as well as the quality of schooling and the degree to which infrastructure services affect the production of educated labor. Congestion costs in education tend to raise the optimal share of spending on infrastructure. JEL Classification Numbers: O41, H54, I28. ∗I am grateful to Kyriakos Neanidis and other colleagues at the University of Manchester for helpful discussions on the issue discussed in this paper. I bear sole re-sponsibility, however, for the views expressed here