Service Good as an Intermediate Input and Optimal Government Policy in an Endogenous Growth Model

The present article considers an endogenous growth model in which the service output is used as intermediate good in commodity sector, tax is imposed on manufacturing product and the revenue earned is invested to create human capital. It is shown that there exists a unique, saddle path stable steady-state growth rate of human capital accumulation and a unique growth-maximizing tax rate. The optimal tax rate for the command economy is compared with growth-maximizing tax rate in competitive economy. A numerical analysis shows that the command economy will have a higher growth rate than the competitive economy. An extension of the model where households privately spend for accumulation of human capital yields the same growth rate as that of the command economy of the previous model. JEL Classification: E6, H2, O