Public capital, asymmetric information, and economic growth

Abstract

We investigate the provision of public capital in an endogenous growth model with asymmetric information. In a credit market with costly screening, we show that the equilibrium contracts are characterized by the self-selection of borrowers. Through identifying an additional adverse effect of taxation on growth, we show that the optimal tax rate in our model is smaller than the output elasticity of public capital. Therefore, our analysis justifies a more conservative tax policy in the presence of asymmetric information. Furthermore, our model suggests a number of implications that appear to be well supported by preliminary evidence in cross-country data. JEL classification: D82, H21, O41Capital public, information asyme´trique, et croissance e´conomique. Ce me´moire examine la fourniture de capital public dans un mode`le de croissance endoge`ne quand l'information est asyme´trique. Dans un marche´du cre´dit ou`le tamisage est couˆteux, on montre que les contrats en e´quilibre sont conforme´s par l'auto-se´lection des emprunteurs. Par le truchement de l'identification d'un effet additionnel ne´gatif de la fiscalite´sur la croissance, on montre que le taux d'imposition optimal dans le mode`le est plus petit que l'e´lasticite´du produit par rapport au capital public. En conse´quence, l'analyse montre qu'une politique de taxation plus conservatrice est de´fendable quand il y a asyme´trie de l'information. De plus, le mode`le sugge`re un certain nombre de propositions qui semblent bien supporte´es par les re´sultats pre´liminaires d'une analyse transversale de donne´es pour plusieurs pays.We are indebted to two anonymous referees for valuable comments and suggestions that have greatly improved the paper. We also wish to thank Nan-Kuang Chen, Charles Leung, Ping Wang, and participants at the Second Biennial Conference of Hong Kong Economic Association, December 2002, for helpful feedback and comments. Of course, the usual disclaimer applies.

Asymmetric Information, Government Fiscal Policies, and Financial Development

“…This result is consistent with Ho and Wang (2005), who have found a significant positive correlation between various indicators of financial development and the government share. This result has an implication for economic development.…”

“…The model's environment is modified slightly from that of Bose and Cothren (1996) and Ho and Wang (2005). The economy consists of an infinite sequence of two-periodlived overlapping generations.…”

“…Screening, of course, entails costs. As is in Bose and Cothren (1996) and Ho and Wang (2005), each unit of loan quantity screened absorbs d units of output, where d, 1 > d > 0, is exogenously given. The advantage of this setting is that the screening cost can be viewed as an indicator of financial development.…”

Endogenous growth and adverse selection in entrepreneurship

“…3 Ho and Wang (2005) obtain the same result and also argue that this implies a negative relation between adverse selection and growth. 4 See King and Levine (1993a, b), Beck et al (2000), Levine and Zervos (1998), Rousseau and Wachtel (1998), Ho and Wang (2005), Levine et al (2000), and Neusser and Kugler (1998).…”

“…4 See King and Levine (1993a, b), Beck et al (2000), Levine and Zervos (1998), Rousseau and Wachtel (1998), Ho and Wang (2005), Levine et al (2000), and Neusser and Kugler (1998). 5 See Jaramillo et al (1993) and Harris et al (1994).…”