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Government Spending in a Simple Model of Endogeneous Growth

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Barro, Robert J. 1990. Government spending in a simple model of endogeneous growth. Journal of Political Economy 98(S5): 103-125.

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Government Spending in a Simple Model of Endogenous Growth

Robert J. Barro
Harvard Universityand National Bureau of EconomicResearch

One strandof endogenous-growth models assumes constant returns to a broad concept of capital. I extend these models to include taxfinanced government services that affect production or utility. Growth and saving rates fall with an increase in utility-type expenditures; the two rates rise initially with productive government expenditures but subsequently decline. With an income tax, the decentralizedchoices of growth and saving are "too low," but if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency. Empirical evidence across countries supports some of the hypotheses about government and growth.

Recent models of economic growth can generate long-term growth without relying on exogenous changes in technology orpopulation. Some of the models amount to theories of technological progress (Romer 1986; this issue) and others to theories of population change (Becker and Barro 1988). A general feature of these models is the presence of constant or increasing returns in the factors that can be accumulated (Lucas 1988; Romer 1989; Rebelo 1991).
This research is supported by the National Science Foundation and theBradley Foundation and is part of the National Bureau of Economic Research's project on economic growth. I am grateful for comments from Gary Becker, Fabio Canova, Brad De Long, Daniel Gros, Herschel Grossman, Bob Hall, Ken Judd, Harl Ryder, Steve Slutsky, Juan Jose Suarez, and Larry Summers. I have also benefited from discussions at the National Bureau of Economic Research, Brown University, theUniversity of Florida, and the conference, "The Problem of Development: Exploring Economic Development through Free Enterprise," State University of New York at Buffalo, May 1988.
[Journal of Political Economy, 1990, vol. 98, no 5, pt 2] ? 1990 by The University of Chicago. All rights reserved. 0022-3808/90/9805-0011$01.50

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One strand of theliterature on endogenous economic growth concerns models in which private and social returns to investment diverge, so that decentralized choices lead to suboptimal rates of saving and economic growth (Arrow 1962; Romer 1986). In this setting private returns to scale may be diminishing, but social returns-which reflect spillovers of knowledge or other externalities-can be constant or increasing.Another line of research involves models without externalities, in which the privately determined choices of saving and growth are Pareto optimal (Rebelo 1991). These models rely on constant returns to private capital, broadly defined to encompass human and nonhuman capital. The present analysis builds on both aspects of this literature by incorporating a public sector into a simple, constant-returnsmodel of economic growth. Because of familiar externalities associated with public expenditures and taxes, the privately determined values of saving and economic growth may be suboptimal. Hence there are interesting choices about government policies, as well as empirical predictions about the relations among the size of government, the saving rate, and the rate of economic growth. I. Endogenous...