Public Investment, Congestion, and Private Capital Accumulation

This paper analyses the impact of public investment on the dynamics of private capital formation in an intertemporal optimising market‐clearing framework. The key feature characterising the analysis is that the public good is treated as a durable capital good, subject to congestion. We show how in the presence of congestion the effect of government investment on private capital formation involves a tradeoff between the degree of substitution between private and public capital in production and the degree of congestion. Both lump‐sum and distortionary tax financing are considered, with this tradeoff being tightened in the latter case