Long-run effects of Public Capital rent dissipation

We consider an overlapping generation model where the consumption commodity is produced by means of a constant returns to scale technology that uses both private and public inputs. Congestion is addressed by sharing the rents of public capital between the private factors (labor and capital). We analyze what happens to the equilibrium when there is an exogenous increase in the stock of public capital. The impact of such an increase is decomposed into three different effects that work through factor prices and the higher level of taxation required for finance the public investment. One key parameter is the fraction of the rents created by the public capital that goes to labor.