Financing productive local public goods

Public economics typically assumes that local public goods only affect the utility of consumers. We analyze the case of purely productive local public goods within standard growth models. Investment in the public good enhance s productivity only in the jurisdiction where it takes place. Capital, as w ell as people, is perfectly mobile. After characterizing the first-best equ ilibrium, we show that its decentralization to fiscally independent jurisdi ctions is more demanding than with local public consumer goods. In particul ar, efficient decentralization cannot be obtained with competitive land dev elopers providing the public good through a simple land capitalization sche me. (C) 1999 Academic Press.