A Note on Infrastructure Expenditure, Uncertainty and Growth*

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.

Income tax progressivity, growth, income inequality and welfare

“…See, e.g. Echevarria (2012Echevarria ( , 2013, Mauro (1995) or Smith (1996). Fourth, the progressive tax schedule introduced by Li and Sarte (2004) is here replaced by that in Heathcote et al (2014).…”

An Empirical Relationship between Government Size and Economic Growth of Pakistan in the Presence of Different Budget Uncertainty Measures

“…Other control variables can be augmented directly in the equation (3) following Lensik et. al.,(1999) or indirectly through productivity channel following Amir and Dar (2002) and Echevarria, (2012). We have applied two of the approaches.…”