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The Welfare Gains of Cooperative Public Infrastructure Policies: A Trade and Supply-Side View

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  • Rym Aloui
  • Aurélien Eyquem

Abstract

We investigate the optimal levels of public investment in infrastructure in a two-country open-economy model with production externality and distortionary taxation. In the model, transport costs fall with local and foreign stocks of public infrastructure, but more strongly with the foreign stock. We provide empirical evidence supporting this assumption, and show that it generates sizable welfare gains from international cooperation, from 0.15% in the baseline case to more than 5% of permanent consumption under alternative calibrations. We also discuss the endogenous responses of cooperative and non-cooperative levels of public investment in infrastructure to productivity shocks.

Suggested Citation

  • Rym Aloui & Aurélien Eyquem, 2020. "The Welfare Gains of Cooperative Public Infrastructure Policies: A Trade and Supply-Side View," Annals of Economics and Statistics, GENES, issue 140, pages 27-44.
  • Handle: RePEc:adr:anecst:y:2020:i:140:p:27-44
    DOI: 10.15609/annaeconstat2009.140.0027
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    More about this item

    Keywords

    Public Infrastructure; Endogenous Transport Costs; International Cooperation; Open Economy.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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