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Infrastructure Quality and the Subsidy Trap

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  • Shaun McRae

    (Stanford Univeristy)

Abstract

Low quality infrastructure is a major barrier to economic advancement in developing countries. This paper develops an empirical framework to explain the persistence of this problem as the result of a targeted program of utility subsidies. I estimate a structural model of household demand for electricity, using customer billing data from Colombia matched to household characteristics and network outage data. I then predict the change in consumption from upgrading households with low quality connections. Combining this with cost and regulatory data, I calculate the change in the utility firm’s profits from the upgrade. I demonstrate that the existing program of targeted subsidies in Colombia deters investments to modernize infrastructure in areas with unreliable electricity supply. Households in these areas receive low quality service for which they do not pay, firms receive transfers from the government to tolerate areas with non-payment, and the government provides these transfers to prevent mass disconnections of non-payers. Based on the model estimates, I analyze less costly subsidy programs that provide stronger incentives for firms to upgrade neighborhoods with low quality connections. This paper closes with a discussion of how these results can be applied to the design of upgrade and subsidy programs in other countries.

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Bibliographic Info

Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 09-017.

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Date of creation: Nov 2009
Date of revision: Nov 2009
Handle: RePEc:sip:dpaper:09-017

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Related research

Keywords: developing countries infrastructure; infrastructure subsidies; subsidy trap;

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References

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  1. Marcela Meléndez Arjona & Camila Casas & Pablo Medina, 2004. "Subsidios al Consumo de los servicios Públicos en Colombia ¿Hacia Donde Movernos?," INFORMES DE INVESTIGACIÓN 003529, FEDESARROLLO.
  2. Irina Klytchnikova & Michael Lokshin, 2009. "Measuring Welfare Gains from Better Quality Infrastructure," Journal of Infrastructure Development, India Development Foundation, vol. 1(2), pages 87-109, December.
  3. Carlos Medina & Leonardo Fabio Morales, . "Demanda por Servicios Públicos Domiciliarios en Colombia y Subsidios: Implicaciones sobre el Bienestar," Borradores de Economia 467, Banco de la Republica de Colombia.
  4. Sheila Olmstead & W. Michael Hanemann & Robert N. Stavins, 2007. "Water Demand Under Alternative Price Structures," NBER Working Papers 13573, National Bureau of Economic Research, Inc.
  5. Munasinghe, Mohan, 1980. " Costs Incurred by Residential Electricity Consumers Due to Power Failures," Journal of Consumer Research, University of Chicago Press, vol. 6(4), pages 361-69, March.
  6. Leonardo Morales & Carlos Medina, 2007. "Stratification and Public Utility Services in Colombia: Subsidies to Households or Distortion of Housing Prices?," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  7. Kristin Komives & Vivien Foster & Jonathan Halpern & Quentin Wodon & Roohi Abdullah, 2008. "Water, Electricity, and the Poor : Who Benefits from Utility Subsidies?," World Bank Other Operational Studies 11745, The World Bank.
  8. Nesbakken, Runa, 2001. " Energy Consumption for Space Heating: A Discrete-Continuous Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(1), pages 165-84, March.
  9. repec:fth:stanho:e-90-11 is not listed on IDEAS
  10. Ellen M. Pint, 1999. "Household Responses to Increased Water Rates during the California Drought," Land Economics, University of Wisconsin Press, vol. 75(2), pages 246-266.
  11. Cardoso, Rafael Balbino & Nogueira, Luiz Augusto Horta & Haddad, Jamil, 2010. "Economic feasibility for acquisition of efficient refrigerators in Brazil," Applied Energy, Elsevier, vol. 87(1), pages 28-37, January.
  12. Julie A. Hewitt & W. Michael Hanemann, 1995. "A Discrete/Continuous Choice Approach to Residential Water Demand under Block Rate Pricing," Land Economics, University of Wisconsin Press, vol. 71(2), pages 173-192.
  13. Thomas MaCurdy & David Green & Harry Paarsch, 1990. "Assessing Empirical Approaches for Analyzing Taxes and Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 415-490.
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Citations

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Cited by:
  1. Michael Greenstone & B. Kelsey Jack, 2013. "Envirodevonomics: A Research Agenda for a Young Field," NBER Working Papers 19426, National Bureau of Economic Research, Inc.
  2. Theresa Chaudhry, 2010. "Estimating Residential Electricity Demand Responses in Pakistan’s Punjab," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(Special E), pages 107-138, September.
  3. Catherine Wolfram & Orie Shelef & Paul J. Gertler, 2012. "How Will Energy Demand Develop in the Developing World?," NBER Working Papers 17747, National Bureau of Economic Research, Inc.

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