Congestible Public Goods and Indeterminacy in a Two-sector Endogenous Growth Model

Abstract

This paper develops a new mechanism for local indeterminacy in a constant-return, two-sector, human capital enhanced growth model, with productive public spending financed by the income taxation in the goods sector. The use of productive public goods services is subject to an external congestion effect in association with the quantity of aggregate physical as well as human capital used in the economy. We establish local indeterminate equilibrium paths driven by the congestion effect. The possibility of local indeterminacy emerges because under constant returns, the congestion effect reduces the marginal contribution of public goods services and increases the marginal contribution of physical as well as human capital, thereby making the social marginal products to deviate from those of the firm’s perspective.two-sector model, indeterminacy, congestion