DP887 | Public Investment and Welfare: Theory and Empirical Implications

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This paper analyses the determinants of public expenditures allocated to investment. We perform welfare analysis in an overlapping generations model with public consumption, public investment, debt and taxes. The optimal public investment share depends positively on the productive contribution of public investment, and negatively on the preference for public consumption relative to private consumption and on the weight that the government assigns to the older generation. We then provide empirical evidence that the old age dependency ratio is the main determinant of the international variability of the share of public resources allocated to investment.