Public Capital, Economic Growth, and Welfare in an Endogenous Growth Model with the Weakest-Link Externality

This paper develops an endogenous growth model with private and public capital accumulation under the weakestlink externality. In the model, labor productivity is subject to the weakest-link externality, composed of the Marshall-Arrow- Romer externality and public capital as pure public goods. Emphasizing discussion of the dynamic equilibrium under the Marshall-Arrow-Romer extemality, this paper shows that the growth-maximizing tax rate differs from the output elasticity of public capital. Furthermore, the growth-maximizing tax rate is equivalent to the welfare-maximizing tax rate if the dynamic equilibrium is subject to the Marshall-Arrow-Romer extemality.