Optimal Public Investment Policy in Urban and Rural Areas

Abstract

This paper shows an optimal public investment allocations for urban and rural areas, respectively. In analyzing the optimal policy, I use a model with two regions and two production sectors consisting of a service sector and a manufacture sector. This paper concludes that, where the economy has greater public infrastructure elasticity of manufacture product, smaller public infrastructure productivity of service sector, and a smaller scale economies, the optimal policy is to invest more in the rural area.

JEL classification: H54, R13, R12, R23