Public Spending on Maintenance and Imperfect Competition

Abstract

This paper presents an endogenous growth model with monopolistic competition in the intermediate-goods sector. Maintenance spending on public capital not only increases the durability of public and private capital, but also raises the efficiency of infrastructure, as in Agenor (2005). We show that the growth-maximizing tax rate and the share of public maintenance spending may be both affected by the mark-up. However, when private depreciation is exogenous, the result is consistent with Agenor's basic model (2005), that is, the growth-maximizing tax rate and the share of maintenance spending are irrelevant to the degree of monopoly power.