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A NOTE ON INFRASTRUCTURE EXPENDITURE, UNCERTAINTY AND GROWTH

Authors

  • CRUZ A. ECHEVARRIA

    1. University of the Basque Country UPV/EHU
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    • I wish to thank the Spanish Ministry of Science and Technology, through Project ECO2009-09732, and Basque Government grant IT-241-07 for their financial support. Helpful comments from the editor and two referees are deeply appreciated. The usual disclaimer applies.


  • Manuscript received 22.9.10; final version received 12.6.12.

Abstract

This note extends the Barro (Journal of Political Economy, Vol. 98 (1990), No. 5 part II, pp. S103–S125) model to a two-period, OLG economy with aggregate uncertainty. We show that the government sizes maximizing average growth and individual welfare in a market economy coincide and are not affected by the introduction of uncertainty. The maximum average growth rate, however, does depend on the aggregate uncertainty, the individuals' risk aversion and how the intertemporal elasticity of substitution compares with one. Individual welfare is lower in the stochastic economy. Failing to include uncertainty overestimates the effect of changes in the government size.

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