The Quality of Public Investment ∗

Macro-level estimates of the productivity of public capital are typically larger than microlevel estimates. The evidence also shows large cross-country differences in the quality of public capital. A general equilibrium growth model is introduced to explain both facts. The productivity of firms specializing in differentiated intermediate inputs depends on public capital whose provision is subject to bureaucratic corruption. Higher corruption lowers the quality of public capital, discourages specialization and development. Persistent differences in this quality results from multiple equilibrium levels of corruption. Simple numerical calculations show that (i) relatively small micro-level productivity effects of public capital can generate large macro-level effects, and (ii) quality differences in public capital can substantially account for the income gap between rich and poor nations. JEL Classification: O11, O43, D73