HOW DO PUBLIC-INVESTMENT AND FINANCIAL FACTORS AFFECT GROWTH IN A DEBT-OVERHANG ECONOMY

In this paper, informational frictions lead to a rationing on the exte rnal finance of the firm in proportion to its internal net worth. We s tudy the endogenously generated growth of an economy with heterogeneou s firms facing a credit constraint. The productivity of individual fir ms is affected by the size of public infrastructures subject to conges tion which are financed through taxes on profits. Growth will be influ enced by the level of the interest rate through interest repayments (a debt-overhang problem) and by the tax rate. It is shown that there ex ists a growth-maximizing financing rule of public investment.