Public Spending with Congestion Costs, Two-sector Model, Equilibrium, and Transitional Dynamics

This thesis consists two following chapters: In chapter 1, we build a two-sector model which includes physical and human capital accumulation, and the government spending in both of above production. The government spending is treated as flow. The new thing is, except the improved effects of government input in production, we also add the congestion cost which also follows with the government input to the model of economy. Through the join of congestion effect, we can observe the whole variables shifting in the model with the changes of congestion level. This shifting expresses the changes of the decisions of representative agent to allocate their inputs to production and consumption, and then further affect long-run growth rate and welfare. In order for simplifying, we assume the congestion cost only occurs in physical capital or final output production sector. Besides, we present the simulation of the model with congestion shifting, and broadly finding out the conclusions: 1) the increase of congestion cost will hurt the government spending which is beneficent to the equilibrium growth, and makes growth decline no matter what the sector capital intensities are. 2) On the other hand, increase of congestion cost forces representative agent or household to withdraw their input from production to consumption while growth rate declines simultaneously, and if final output is physical capital intensively, the equilibrium welfare is improved because of the domination of consumption increase. Therefore, if final output is human capital intensively, and then welfare will be decreased since now the negative effect of growth rate decrease dominates. 3) When productivity increases in final output or human capital sector, congestion increase has contrasting effects to the adjustment processes in physical and human capitals which rely on the sector capital intensities and which sector does productivity improvement occur. And also, congestion increase will weaken the benefit of productivity improvement to growth rate in equilibrium. In chapter 2, we expand our model with the congestion costs in both physical and human capital production sectors simultaneously. Since according to the previous literature, the common situation of congestion cost which is discussed before is forced in final output or physical capital sector; the case of human capital sector is rarely and specially analyzed in developing or low-income countries. For this reason, we separate our model into two parts: developed and developing countries by given different ranges of congestion level. With these differences of congestion-defined countries, we can proceed to compare two types of countries with several shifting of given coefficients. Again, with simulating the model with the shifting of congestion, including simple congestion shifting, both congestion shifting in the same direction and both congestion's shifting in opposite directions, we can find the impact of congestion changes to other variables in quantitative and qualitative ways. Generally speaking, the aggregate/net effects from congestion shifting will be majorly influenced by the sector capital intensities in both sectors and secondarily by the congestion levels which define countries. The lesser impact comes from the optimal growth-maximizing and welfare-maximizing fiscal policies being used. Besides, when productivity increases either in final output or in human capital sector, developed countries have slower speed of convergence than developing countries. But when productivity increase causes developing countries to be close to developed countries, their speed of convergence will be retarded by the congestion adjustments in transitional dynamics. Higher congestion cost in public infrastructure causes more effective impact to slow down the speed of adjustments than in public education.