Public investment in infrastructure in a simple growth model

In this paper, we examine the implications for capital accumulation when infrastructure enters as an external input into private production functions. In our model, infrastructure is nonexclusive but may exhibit varying degrees of nonrivalry. Revenues from uniform taxes on capital and labor income are used to finance public investment in infrastructure. We show that the optimal tax rate is independent of the degree of nonrivalry. When production exhibits constant returns to augmentable factors, the equilibrium displays constant growth. For most parameters, the growth rate depends on the population size. Under decreasing returns, the optimal trajectory exhibits monotonic convergence to a steady state level.