The consequences of openness and imperfect competition on the relationship between growth and public infrastructure.

Summary In a closed economy with perfect competition, Barro [1990] demonstrates the existence of an optimal size of public intervention: when the government finances productive infrastructure, the growth-maximizing tax rate is equal to the elasticity of output relative to public infrastructure. It is therefore determined by purely technological considerations. In the first part, we lift the assumption of perfect competition. Under imperfect competition in the market for capital goods, and in the absence of discrimination, we show that the optimal size of public spending can be increasing with the price elasticity of government demand (representing here an indicator of the efficiency of government management), and even exceeds that obtained by Barro under perfect competition. In the second part, we return to the closed economy hypothesis. When economies are interdependent, we show that even if the size of public infrastructure is strongly constrained by the mobility of capital, governments retain some room for manoeuvre in the choice of this size. A process of economic integration, such as that of the European Union, does not necessarily lead to downward tax harmonization.