Competitive equilibrium and public investment plans

We examine a one-sector growth model in which public capital is an external input to private production functions. Revenues from taxing capital and labor income are used to fund public investments. The competitive equilibrium can be obtained by solving an artificial planning problem. We prove that there exists a unique competitive equilibrium which can be characterized by Euler equations and a transversality condition. We then establish the existence of an optimal public investment plan. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: E1; E6; H4.