Distributional effects of public policy choices

This paper examines the effects of a budget-neutral public spending allocation between public investment and private investment subsidy on inequality dynamics and intergenerational mobility in an environment with heterogeneous households and incomplete capital market.

► We study the effects of productive public choices on inequality persistence. ► The government subsidizes private investment and also invests in public capital. ► The distributional effect is determined by the factors' elasticity of substitution. ► If it is greater than unity, an increase in public investment mitigates inequality. ► If it is less than unity, investment subsidy rather leads to a more equal society.