where 0 < α < 1 is the output elasticity of private capital, A is a technological parameter, Ki
denotes the stock of private capital for firm i, Li the labor used by the representative firm, Kg
is the aggregate stock of public capital, and L is the total labor force. Therefore, each individual
firm benefits from an increase in economy-wide labor productivity (Kg
L ) triggered by a rise in the
stock of public capital. Under the above assumptions, the aggregate production function for our
hypothetical economy can be reduced to the standard AK model1 since
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