Fiscal policy and endogenous growth with public infrastructure

Optimal tax and spending allocation rules are derived in an endogenous growth model where raw labor must be educated to become productive and infrastructure services affect the schooling technology. Growth- and welfare-maximizing solutions are compared under nonseparable utility in consumption and government-provided services. Among other results, it is shown that the optimal share of spending on infrastructure depends not only on production elasticities but also on the quality of schooling and the degree to which infrastructure services affect the production of educated labor. Congestion costs in education raise the optimal share of spending on infrastructure.