---

Presence of government in economy, particularly after Great Depression in the 1930s, following Keynes theory, has had different consequences for the economy. The governments, using appropriate fiscal instruments, have made considerable contribution to capital formation, economic growth, economic stability, employment, equality and proper allocation and mobilization of resources. On the other hand, inappropriate interventions of governments in economy can cause some undesirable results such as corruption, reduction in private investment, rent seeking and so on. Therefore, the volume of government activities has been a matter of interest to experts and economists in recent decades. Making investments, as an integral component of aggregate demand and a pillar of economic development, has been affected by the activities of the public sector. This paper examines the relationship between government expenditures and private investments in construction sector for the time period (1970-2007). The main difference between this study and other researches in this field, in the country, is the attention given to the mode of financing costs in the model. The long term coefficients represent that capital expenditures on machinery and construction have crowding-in and crowding-out effects, respectively, on private investment in construction sector. Capital expenditures on machinery are more effective, if financed by tax revenues, while capital spending on construction is more effective when the non-tax sources are provided. The government expenditure has crowding-in effect when financed by tax, while the expenditure does not have significant effect when financed by non-tax resources.