Government Spending in a Simple Model of Endogeneous Growth

Government Spending in a Simple Model of Endogeneous Growth

1990 | Robert J. Barro
Robert J. Barro's 1990 paper, "Government Spending in a Simple Model of Endogenous Growth," explores the impact of government spending on economic growth and saving rates. The model assumes constant returns to a broad concept of capital, including human and nonhuman capital. The analysis incorporates a public sector that provides services to households, which can affect production or utility. The key findings are: 1. **Growth and Saving Rates**: Growth and saving rates initially increase with productive government expenditures but subsequently decline. 2. **Taxation**: With an income tax, decentralized choices of growth and saving are "too low." However, if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency. 3. **Empirical Evidence**: Empirical evidence across countries supports some hypotheses about the relationship between government size, saving rate, and economic growth. 4. **Production Function**: The production function is Cobb-Douglas, where the marginal product of capital is constant, and the marginal product of public services is increasing. 5. **Optimal Government Size**: The optimal size of government that maximizes growth and utility is determined by the condition that the marginal product of public services is unity (φ' = 1). 6. **Planning Problem**: The decentralized choices of households lead to outcomes that are not Pareto optimal due to externalities from public expenditures and taxation. The planning problem, where the government optimizes the utility of the representative household, yields higher growth rates. 7. **Tax Systems and Property Rights**: An improvement in property rights, such as through enhanced enforcement of laws and order, can increase the effective value of the income tax rate, leading to higher growth and saving rates. 8. **Government Consumption Services**: When the government also provides consumption services, the optimal share of productive government spending is smaller, but this choice does not maximize the utility attained by the representative household. The paper concludes with empirical implications, suggesting that variations in the share of productive government expenditures and nonproductive government expenditures across countries can explain differences in growth and saving rates.Robert J. Barro's 1990 paper, "Government Spending in a Simple Model of Endogenous Growth," explores the impact of government spending on economic growth and saving rates. The model assumes constant returns to a broad concept of capital, including human and nonhuman capital. The analysis incorporates a public sector that provides services to households, which can affect production or utility. The key findings are: 1. **Growth and Saving Rates**: Growth and saving rates initially increase with productive government expenditures but subsequently decline. 2. **Taxation**: With an income tax, decentralized choices of growth and saving are "too low." However, if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency. 3. **Empirical Evidence**: Empirical evidence across countries supports some hypotheses about the relationship between government size, saving rate, and economic growth. 4. **Production Function**: The production function is Cobb-Douglas, where the marginal product of capital is constant, and the marginal product of public services is increasing. 5. **Optimal Government Size**: The optimal size of government that maximizes growth and utility is determined by the condition that the marginal product of public services is unity (φ' = 1). 6. **Planning Problem**: The decentralized choices of households lead to outcomes that are not Pareto optimal due to externalities from public expenditures and taxation. The planning problem, where the government optimizes the utility of the representative household, yields higher growth rates. 7. **Tax Systems and Property Rights**: An improvement in property rights, such as through enhanced enforcement of laws and order, can increase the effective value of the income tax rate, leading to higher growth and saving rates. 8. **Government Consumption Services**: When the government also provides consumption services, the optimal share of productive government spending is smaller, but this choice does not maximize the utility attained by the representative household. The paper concludes with empirical implications, suggesting that variations in the share of productive government expenditures and nonproductive government expenditures across countries can explain differences in growth and saving rates.
Reach us at info@study.space
[slides] Government Spending in a Simple Model of Endogeneous Growth | StudySpace