An endogenous growth model having two types of capital demonstrates
the effects of relative input price distortions on growth and welfare.
The effect's magnitude depends on the production elasticity of
substitution while subsidized inputs and investment goods can increase
growth despite the ill effects on welfare. However, a subsidy to a
single capital good financed by a tax on another good lowers growth.
Results show adverse effects of the variance of investment goods'
relative prices across sectors. In addition, penalizing investment goods
and distorting financial markets lowers growth.