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ENDOGENOUS TIME PREFERENCE AND PUBLIC POLICY: GROWTH AND FISCAL IMPLICATIONS

Published online by Cambridge University Press:  22 October 2010

Evangelos V. Dioikitopoulos*
Affiliation:
University of Cyprus
Sarantis Kalyvitis
Affiliation:
Athens University of Economics and Business
*
Address correspondence to: Evangelos V. Dioikitopoulos, Department of Economics, University of Cyprus, P.O. Box 20537, CY-1678 Nicosia, Cyprus; e-mail: evangelos.dioikitopoulos@aueb.gr.

Abstract

This paper studies the growth and fiscal policy implications of the assumption that public policy generates an externality in the individual rate of time preference through the aggregate public capital stock. We examine the competitive equilibrium properties and we solve for endogenous growth–maximizing fiscal policy. We investigate the behavior of the government size and the growth rate to the sensitivity of time preference to public capital and the magnitude of public capital externality on production. We find that the Barro taxation rule [Barro, Robert J., Journal of Political Economy 98 (1990), 103–125], which states that the elasticity of public capital in the production function should equal the government size, is suboptimal. We show that the government does not necessarily have to increase income taxation following a rise in public capital intensity because of the externality of public capital on time preference and, in turn, on growth and the tax base of the economy.

Type
Articles
Copyright
Copyright © Cambridge University Press 2010

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