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Economic Quarterly

Winter 2003

Efficient Public Investment in a Model with Transition Dynamics

Pierre-Daniel G. Sarte and Jorge Soares

In 2001, the U.S. government spent $290 billion on public investments spanning such diverse projects as highways, aircraft electronics, sewer and water systems, government buildings, and conservation. This amount represents roughly 3 percent of GDP and is comparable in size to net exports. The authors' study of the efficient provision of public investment reveals, contrary to previous work on this topic, that the efficient share of gross public investment in output is less than the public capital elasticity of output. Furthermore, this share depends importantly on underlying preferences and technology. Another finding is that the elasticity of final output with respect to government capital is likely to be low at less than 0.1.

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