Public capital, asymmetric information, and economic growth

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 taxatio...

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Bibliographic Details
Published in:The Canadian journal of economics 2005-02, Vol.38 (1), p.57-80
Main Authors: Ho, Wai-Hong, Wang, Yong
Format: Article
Language:English
Subjects:
Asymmetric information
Capital
Economic growth
Economic growth models
Economic growth rate
Economic modeling
Economic theory
Fiscal policy
Growth models
Income taxes
Information asymmetry
Lenders
Optimal taxation
Public capital
Public expenditure
Public finance
Public investment
Studies
Tax rates
Taxation
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Summary: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.
ISSN:0008-4085
1540-5982
DOI:10.1111/j.0008-4085.2005.00269.x