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In an extensive survey of the literature, Straub (2007) finds that empirical studies that use physical indicators of infrastructure generally find a significant positive output or growth contribution of infrastructure. However, less than half of the empirical studies using expenditure-based infrastructure measures find significant positive growth effects.
Hulten (1996) finds that differences in the effective use of infrastructure resources explain one-quarter of the growth differential between Africa and East Asia, and more than 40 percent of the growth differential between low-and high-growth countries. Calderon and Serven (2008) find evidence that an improved quality of infrastructure services can have a positive effect on long-run growth in Sub-Saharan African. Using firm-level data for Uganda, Reinnikka and Svensson (2002) show that poor provision of public infrastructure services significantly reduces investment in the productive capacity of firms.
Esfahani and Ramirez (2003) show that the growth effects of infrastructure depend upon the strength of a country’s institutions, such as contract enforcement and bureaucratic efficiency. Dal Bo and Rossi (2007) find that greater corruption is significantly associated with lower efficiency of electricity distribution.
This is consistent with Duggal et al (2007) who show that public capital, through a combination of its direct productivity effect, as well as its indirect effect through efficiency-enhancing externalities, has the potential to generate increasing returns to scale at the aggregate level.
These strategic interactions have been incorporated into several models of corruption (see Andvig and Moene, 1990). Mauro (2004) relies on strategic complementarities similar to the ones considered in our paper to explain the persistence of corruption and low growth in some countries. However, he does not examine the implications of the quality of public investment spending and bureaucratic oversight for specialization and capital accumulation.
The assumption that all first period income is saved is made for convenience. Non-trivial saving decisions only affect steady-state income levels, but not income ratios or the effect of public investment on output.
The intermediate goods can be interpreted as the many specialized goods that are used in multiple stages of production. Output of the final good is increasing in the range of intermediate goods with an elasticity greater than one.
This can be interpreted as an allocation of talent condition: the government can induce potential bureaucrats to take up public office only by paying them what they could earn elsewhere (see Acemoglu and Verdier, 1998).
Bureaucrats are also responsible for tax collection which could be subject to bribery and tax evasion. But this does not arise in our model as all households have the same income and are subject to the same tax liability.
See Sarte (2001) for a model of bureaucratic oversight and effectiveness of productive government spending.
The former holds as long as π(v) is not sharply concave.
Few of these papers explicitly consider corruption or inefficiencies in public investment provision.