National and Regional Economic Growth with Fiscal Policies: Congested Public Goods and Endogenous Labor Supply of a Small-Open Economy

The purpose of this study is to build a two-regional growth model with capital accumulation, endogenous time distribution between leisure and labor, and regional public goods with fiscal policies. We emphasize dynamic interactions among capital accumulation, externalities, supply of public good with different fiscal policies, congestion of public good, endogenous time, and economic geography. The economy consists of two regions and each region consists of the industrial sector and public sector. First, we develop the two-region growth model with public goods and fiscal policies. Second, we show how to find equilibrium values of the dynamic system. Then, we simulate model with specified parameter values. Finally, we carry out comparative statics analysis with regard to parameter changes in tax rates and congestion. Our comparative statics analysis provides some important insights. For instance, a main difference between the effects of increasing the two regions’ tax rates on the output is that as region 1’s (2’s) tax rate on the industrial sector is increased, the national industrial output, national capital employed by the economy, and the national wealth are increased (reduced).