and Development Economics

This paper studies the optimal allocation of government spending between infrastructure and health (which affects labor productivity as well as household utility) in an endogenous growth framework. A key feature of the model is that infrastructure affects not only the production of goods but also the supply of health services. The first part considers the case where health enters as a flow in production and utility, whereas the second focuses on a “stock ” approach. Growth-and utility-maximizing rules for output taxation and the allocation of public spending are derived. It is shown, in particular, that the welfare-maximizing share of spending on health exceeds the growth-maximizing share. JEL Classification Numbers: O41, H54, I18 ∗I am grateful to Kyriakos Neanidis for helpful discussions. I bear sole responsibility, however, for the views expressed here