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Political Economy of Infrastructure Investment: A Spatial Approach

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Author Info
Kieron Meagher
Arghya Ghosh

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Abstract

The importance of infrastructure for growth is well established in the macroeconomic literature. Previous research has treated public investment in infrastructure as exogenous. We remedy this shortcoming by providing a political economy analysis of infrastructure choice based upon consumer preferences derived from spatial competition models. The transport cost parameter providesa natural index of infrastructure in these models. In this setting, infrastructure investment has two possible effects: to directly lower transaction costs and indirectly to affect market power. We begin with a single marketplace model in which only the direct effect is present and then bring in the indirect effect by extending the analysis to competition on the circle. Analysis of market structure, consumer participation, entry and transport cost curvature give a rich variety of results. Socially optimal outcomes occur in some cases but infrastructure traps are common. Our results suggest that in less developed countries competition enhancing policies are a key prerequisite for public support of infrastructure investment

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 561.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:561

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Related research
Keywords: Spatial Competition; Political Economy; Market Structure; Infrastructure Investment; Voting;

Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior
H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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  2. Neven, Damien J., 1986. "On Hotelling's competition with non-uniform customer distributions," Economics Letters, Elsevier, vol. 21(2), pages 121-126. [Downloadable!] (restricted)
  3. Tabuchi, Takatoshi & Thisse, Jacques-Francois, 1995. "Asymmetric equilibria in spatial competition," International Journal of Industrial Organization, Elsevier, vol. 13(2), pages 213-227. [Downloadable!] (restricted)
  4. Tom Ross, 1990. "Cartel Stability And Product Differentiation," Carleton Industrial Organization Research Unit (CIORU) 90-04, Carleton University, Department of Economics.
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  5. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January. [Downloadable!] (restricted)
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  6. Lars-Hendrik Roller & Leonard Waverman, 2001. "Telecommunications Infrastructure and Economic Development: A Simultaneous Approach," American Economic Review, American Economic Association, vol. 91(4), pages 909-923, September. [Downloadable!] (restricted)
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  7. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Social Choice: A Mean Voter Theorem," Econometrica, Econometric Society, vol. 59(1), pages 1-23, January. [Downloadable!] (restricted)
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  8. Anderson, Simon P. & Goeree, Jacob K. & Ramer, Roald, 1997. "Location, Location, Location," Journal of Economic Theory, Elsevier, vol. 77(1), pages 102-127, November. [Downloadable!] (restricted)
  9. Bester, Helmut & de Palma, Andre & Leininger, Wolfgang & Thomas, Jonathan & von Thadden, Ernst-Ludwig, 1996. "A Noncooperative Analysis of Hotelling's Location Game," Games and Economic Behavior, Elsevier, vol. 12(2), pages 165-186, February. [Downloadable!] (restricted)
  10. John G. Fernald, 1999. "Roads to Prosperity? Assessing the Link between Public Capital and Productivity," American Economic Review, American Economic Association, vol. 89(3), pages 619-638, June. [Downloadable!] (restricted)
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  11. Osborne, Martin J & Pitchik, Carolyn, 1986. "The Nature of Equilibrium in a Location Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 223-37, February. [Downloadable!] (restricted)
  12. Anderson, Simon P, 1988. "Equilibrium Existence in the Linear Model of Spatial Competition," Economica, London School of Economics and Political Science, vol. 55(220), pages 479-91, November. [Downloadable!] (restricted)
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