Optimal Growth with Public Capital and Public Services

We characterize optimal economic growth in an endogenous growth model in which production requires public capital (a stock) and public services (a flow) in addition to private capital and labor. We analyze the comparative static effects of changes in the fundamental technological and preference parameters of the model on the optimal values of several variables, such as the optimal rate of growth and the optimal allocation of resources among consumption, the provision of public services, and investment in public and private capital. We show that the general optimal path converges in finite time to the balanced growth optimal path. We relate our paper to important contributions to the existing literature by obtaining them as special cases of our model.