Social Infrastructure and the Preservation of Physical Capital: Equilibria and Transitional Dynamics

Abstract

We study the mechanisms according to which social infrastructure influences the preser- vation of physical capital and, consequently, economic growth. The model considers that social infrastructure is a specific type of human capital, which acts in order to preserve already existing physical capital, by, e.g., reducing the incentive for rent seeking or cor- ruption. Using an innovative methodology in economics, the Gröbner bases, we study the equilibrium of our model and conclude for the existence of two feasible steady-states or of unicity according to different combinations of parameters, highlighting a trade-off between consumption and production on one hand and social infrastructure and physical capital accumulation, on the other. We also present sufficient conditions for saddle-path stabil- ity. Finally, we describe transitional dynamics and calculate welfare effects from which we show that strengthening social infrastructure increases welfare.