Composition Of Public Expenditures And Economic Growth: A Dynamic Analysis
Author: Shaheen Naseer

The composition of public spending has important implications for economic growth. This study has developed an analytical framework that allows us to study the role of the composition of public spending in the process of economic growth. The study has focused on two approaches to modeling the fiscal policy. First, following Park and Philippopoulos (2003) it is assumed that a benevolent government chooses the composition of public spending including utility enhancing and productivity enhancing expenditures. Second, we consider a framework where composition of public spending is determined endogenously on the basis of voter preferences in a game-theoretic setting. A key feature of our approach, as opposed to Haruyama and Itaya (2006), is that we introduce endogenous policy instrument of utility enhancing public expenditures into the utility function of the consumer. Using this model, we find the equilibrium condition and steady state growth rate of consumption where consumer’s utility not only depends on private consumption but also on public consumption. An added feature in our framework is the explicit incorporation of elastic labor supply in the model. This allows us to study the role of fiscal policy in a setting where fiscal policy can alter the incentives of workers towards work and leisure. The study has analyzed how economic policy of public expenditures composition is formulated and what are the allocative impacts of fiscal policy. When policy is chosen by a benevolent government, it chooses the composition of public spending to maximize growth while at the same time minimizing the distortions caused by taxation. However, when voters choose economic policy they selfishly decide that which component of public expenditure composition is going to give them maximum benefit. For them their own utility is more important than the overall impact of this choice on the economy, and their choice plays significant role in the determination of balanced growth path. Supervisor:- Dr. Musleh ud Din

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Keywords : Economic Growth, Public Expenditures
Supervisor: Musleh ud Din

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