Abstract
Behavioral differences between economies where infrastructure is privately provided and where the government is the sole provider are examined in the context of a growing economy. The choice between private and public provision generates differences in the private sector's ability to internalize capital utilization decisions and market prices along the equilibrium path. This in turn has a crucial impact on the effects of fiscal policy on resource allocation and welfare in each regime. If the government wants to stimulate infrastructure investment, a subsidy to private providers yields significantly higher welfare gains than an equivalent increase in direct government investment, even with lump-sum tax financing. On the other hand, an income tax is more distortionary under private than under government provision. In designing optimal fiscal policy, while a constant income tax-infrastructure subsidy combination is jointly required to attain the first-best equilibrium under private provision, the optimal income tax rate must be time-varying under government provision.