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The welfare effects of infrastructure investment in a heterogeneous agents economy

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  • Gibson John

    (Department of Economics and Finance, University of Texas El Paso, El Paso, TX 79902, USA, Phone: +915-747-5245)

  • Rioja Felix

    (Department of Economics, Tulane University, New Orleans, LA 70118, USA)

Abstract

Public infrastructure is one of the foundations for the economic growth of a country. While there is a strong consensus regarding infrastructure’s effect on growth, less is known about the effect of infrastructure on welfare and the distribution of wealth. In this paper, we examine the quantitative effect of infrastructure investment on welfare and the degree of inequality present within a developing country. In so doing, we characterize the effects resulting from increased infrastructure investment by tracing out the entire transition path between steady states. Three results standout: (i) both average and individual welfare effects are sizable, regardless of how the additional investment is financed, (ii) when distortionary taxes are adjusted to finance additional investment, poorer agents benefit more when the interest income tax is used, while richer agents benefit more when either the consumption or labor income taxes are used, (iii) inequality, as measured by the wealth Gini, rises in the short-run, but the long-run effect depends on which financing method is chosen.

Suggested Citation

  • Gibson John & Rioja Felix, 2020. "The welfare effects of infrastructure investment in a heterogeneous agents economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(1), pages 1-17, January.
    • Handle: RePEc:bpj:bejmac:v:20:y:2020:i:1:p:17:n:26
    DOI: 10.1515/bejm-2019-0095
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    2. Acharya, Viral & Parlatore Siritto, Cecilia & Sundaresan, Suresh, 2022. "Financing Infrastructure in the Shadow of Expropriation," CEPR Discussion Papers 15288, C.E.P.R. Discussion Papers.
    3. Noé Villegas Flores & Yelinca Saldeño Madero & Camilo Alberto Torres Parra & Isidoro Fasolino & Hugo Alexander Rondón Quintana, 2021. "Multi-Criteria Approach for Prioritizing and Managing Public Investment in Urban Spaces. A Case Study in the Triple Frontier," Sustainability, MDPI, vol. 13(6), pages 1-24, March.
    4. Villegas Flores, Noé & Cruz Salvador, Liliana Cristina & Parapinski dos Santos, Ana Carolina & Madero, Yelinca Saldeño, 2021. "A proposal to compare urban infrastructure using multi-criteria analysis," Land Use Policy, Elsevier, vol. 101(C).
    5. Xu, Ruihui & Zhang, Xuliang & Gozgor, Giray & Lau, Chi Keung Marco & Yan, Cheng, 2023. "Investor flow-chasing and price–performance puzzle: Evidence from global infrastructure funds," Research in International Business and Finance, Elsevier, vol. 65(C).

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