PUBLIC CAPITAL AND PATTERNS OF GROWTH IN THE PRESENCE OF THRESHOLD EXTERNALITIES

This paper studies the relation between public capital accumulation and longrun economic growth. We emphasize three phenomena that may be accompanied by the presence of public capital: increasing returns, rivalry, and threshold externalities. We formulate a simple growth model that captures these features of public capital in a tractable manner. Assuming that investment for public capital financed by income taxation, we show that the threshold externalities may generate multiple equilibria, so that the pattern of growth and the realization of a specific steady-growth equilibrium are quite sensitive to the rate of income tax as well as to expectations of agents.