Dynamic linear models with public investment in economic planning

Investment decisions play an important role in designing models of economic growth for both industrialized and developing countries. Investment is considered to be the engine of economic growth and development. Where the volume of private investment is not adequate to sustain a targeted growth rate for the economy, it has often been suggested that productive public expenditure on investment be undertaken to create the infrastructure and incentives necessary to increase private investment. In fact many countries and, in particular, developing countries have engaged in massive public expenditures on infrastructure. This dissertation explores some of these issues in four essays. We begin in chapter 1 by surveying some classes of investment models which are being used by planning practitioners. In chapter 2, we present a planning model of public and private investments based on the so-called Oslo-channel model. It is shown that the optimal solutions derived from the model can be supported by a set of competitive prices. Moreover, the model economy could be decentralized in the Arrow-Hurwicz sense. When considering, from a welfare analysis point of view, an economy in which private investment and public expenditure on investment are undertaken, it is shown in chapter 3 that the incentive effects of productive public investment could lead to a decrease in the given welfare indicator. The incentive effects take the form of positive external effects on the utility function of the consumer and the productive capability of the private sector. Finally, chapter 4 takes up the issue of allocative efficiency of productive public expenditure and private investment in a dynamic planning model with a government budget constraint and a society wealth constraint. It is shown that in this framework, productive efficiency of public expenditure is a necessary but not sufficient condition for allocative efficiency of government expenditure.