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How do public investment and financial factors affect growth in a debt-overhang economy ?

Authors
  • Chatelain, Jean-Bernard
  • Amable, Bruno
Publication Date
Jan 01, 1997
Source
HAL
Keywords
Language
English
License
Unknown
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Abstract

In this paper, informational frictions lead to a rationing on the external finance of the firm in proportion to its internal net worth. We study the endogenously generated growth of an economy with heterogeneous firms facing a credit constraint. The productivity of individual firms is affected by the size of public infrastructures subject to congestion which are financed through taxes on profits. Growth will be influenced by the level of the interest rate through interest repayments (a debt-overhang problem) and by the tax rate. It is shown that there exists a growth-maximizing financing rule of public investment.

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