Economic Growth

Abstract

We develop a Solow type growth model where firms produce a single homogenous good using labor, private capital and a public good. The "amount" of public good depends on current government spending and government quality. Quality is the result of the accumulation of public capital. Governments charge distortionary taxes and provide the public good, investing also in "quality" by accumulating public capital. We analyze how the composition of government spending between current expenditures and quality affects the equilibrium levels. We aim to understand the difference in terms of steady state levels between leviathan, quality driven and benevolent governments.