Public investment, economic growth, and wealth distribution

Abstract

This paper analyzes the effects of public investment on economic growth and wealth distribution in an endogenous growth model with perpetual-youth overlapping generations and idiosyncratic investment risks. Accidental bequests by sudden death and investment risks lead to a widespread wealth distribution with long tails, leading to wealth inequality. Public investment enhances economic growth by increasing the net marginal productivity of private capital. In contrast, excessive investment impedes growth by disturbing private investment due to decreased net marginal productivity. Moreover, public investment reduces wealth inequality by decreasing investment risks through a reallocation from risky to risk-free assets. These growth and distributional effects generate an inverted U-shaped relationship between economic growth and wealth inequality.