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The Political Economy of Infrastructure Investment: Competition, Collusion and Uncertainty

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  • Arghya Ghosh
  • Kieron Meagher

Abstract

Infrastructure, as it impacts transport costs, is crucial in determining equilibrium outcomes in spatial competition; however, infrastructure investment is typically exogenous. Our political economy analysis of infrastructure choice is based upon consumer preferences derived from Salop’s circular city model. In this setting, infrastructure investment has two effects: it directly lowers costs to consumers and indirectly affects market power. We show how political support for infrastructure investments depends crucially on the details of the market. Competition boosts popular support for infrastructure — often excessively so — while collusion leads to underinvestment. The uncertainty produced by infrastructure induced entry leads to traps and thresholds.

Suggested Citation

  • Arghya Ghosh & Kieron Meagher, 2011. "The Political Economy of Infrastructure Investment: Competition, Collusion and Uncertainty," ANU Working Papers in Economics and Econometrics 2011-556, Australian National University, College of Business and Economics, School of Economics.
    • Handle: RePEc:acb:cbeeco:2011-556
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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • H4 - Public Economics - - Publicly Provided Goods

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