a1 University of Reading
a2 University of Exeter and Institute for Fiscal Studies
The paper analyzes a multicountry extension of the Barro model of productive public expenditure. In the presence of positive infrastructural externalities between countries, the provision of infrastructure will be inefficiently low if countries do not coordinate. This provides a role for a supranational body, such as the European Union, to coordinate the policies of the individual governments. It is shown how intervention by a supranational body can raise welfare by internalizing the infrastructural externality. Infrastructural externalities increase the importance of tax policy in the growth process and distribute the benefits of taxation across countries.
Thanks are due to Stephen Turnovsky, seminar participants in Birmingham, Cornell, Dublin, Keele, and Reading, and workshop participants in Brussels, Paris, PGPPE in Graz, and PET09 in Galway.