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SHOULD THE PRIVATE SECTOR PROVIDE PUBLIC CAPITAL?

Published online by Cambridge University Press:  20 March 2007

SANTANU CHATTERJEE
SANTANU CHATTERJEE
Affiliation:
University of Georgia
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Abstract

The choice between private and government provision of a productive public good like infrastructure (public capital) is examined in the context of an endogenously growing open economy. The accumulation of public capital need not require government provision, in contrast to the standard assumption in the literature. Even with an efficient government, the relative costs and benefits of government and private provision depend crucially on the economy's underlying structural conditions and borrowing constraints in international capital markets. Countries with limited substitution possibilities and large production externalities may benefit from governments encouraging private provision of public capital through targeted investment subsidies. By contrast, countries with flexible substitution possibilities and relatively smaller externalities may benefit either from governments directly providing public capital or from regulation of private providers. The transitional dynamics also are shown to depend on the underlying elasticity of substitution and the size of the production externality.

Keywords

Public CapitalPrivate ProvisionInfrastructure ProvisionSubsidiesDistortionary Taxation
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 3 , June 2007 , pp. 318 - 346
Copyright
© 2007 Cambridge University Press

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