Finite lifetimes and government spending in an endogenous growth model

Abstract

This paper studies the long-run effects of government spending and taxation in an endogenous growth model with finite lived agents. Public expenditures are classified according to their type: Type I expenditures enter as inputs into the production function. Type II expenditures enter as goods into the utility function. Mourmouras and Lee [Journal of Economics and Business 51(5) (1999) 395] demonstrated that when only Type I expenditures are incorporated into the analysis, the tax rate that maximizes the welfare of the average agent is invariant to life expectancy. It will be demonstrated that their result no long holds when their framework is extended to incorporate Type II expenditures.

Optimum government size and economic growth in case of Indian states: Evidence from panel threshold model

“…Third, once the optimum government size is examined, then this study disaggregates total expenditure into three broad compositions (revenue expenditures, 4 capital expenditure, 5 and social sector expenditures 6 ), and study the "optimum government size" of these compositions and their impact on economic growth as revenue expenditure is growing faster than capital and social sector expenditure across Indian states. 7 The other reason of disaggregating government size into three main compositions because the recent theoretical literature 8 describes that the relationship between "government size and economic growth" alter with respect to types of expenditure (Barro, 1990;Ghosh and Mourmouras, 2002;Kosempel, 2004;Agenor, 2010;Lee et al, 2017).…”

“…Moreover, the model that advanced by Kosempel (2004) and Agenor (2010) considers two types of government expenditure. First, the government expenditure which provides free services to the public such as park, museum, art galleries and healthcare.…”

“…These expenditures directly included in the "utility function." Kosempel (2004) has assumed that income comes from proportional taxes. The utility function can be written as XðtÞ þGðtÞ ¼ τYðtÞor τ x þ τ G ¼ τ: The problem of optimization of consumer's utility can be with "finite horizons":…”

“…adverse when there is an increase in τ G . Therefore, Kosempel (2004) said that Barro curve considers only "second-type expenditure" while first "type-expenditure" adversely impacts the economic growth always. Further, Lee et al (2017) considering all these studies, and proposed a theoretical model which contained both consumer side (demand) and producer side (supply) expenditures, and reached to the three channels through which economic growth altered by expenditure which are as follows: First, crowding effect, second, spinoff effect, and third, resources mobilization effect (see for more details, Lee et al, 2017).…”