Public Consumption Composition in a Growing Economy

This paper explores the role of the composition of public consumption within a three sector R&D growth model. A competitive industry supplies a homogeneous good and a monopolistic sector manufactures a composite commodity di¤erentiated in many varieties, whose size can be increased through investment in R&D. We investigate the e¤ects of changes in the level and in the composition of public consumption on the steady state and on the economy’s transitional dynamics. By varying the aggregate composition of demand, the government can e¤ectively move resources away from traditional industry to foster innovation. Welfare e¤ects are also evaluated. We show that the composition of government consumption a¤ects the entire time path of utility