Public services, increasing returns, and equilibrium dynamics

This paper is concerned with casting off the standard assumption - the production function displays socially constant returns to scale - in a simple growth model with public inputs. In the model, public services work as a source of utility and as an input to production. Making use of the global bifurcation technique, we show that the model can generate a whole spectrum of interesting dynamics, which do not arise with constant returns. Specifically, when increasing returns are not exceedingly strong, not only does an indeterminate steady state take place, but also there exist divergent perfect foresight paths in expanding oscillations and economic cycles. The role of history and expectations in shaping equilibrium is also considered. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: H42; O41; C62.