Openness and Infrastructure Provision
Casual empirical evidence suggests that infrastructure provision is higher in economies that are open to world trade. We develop a model of imperfect competition to show that governments are likely to provide more infrastructure when the country is open to trade. Infrastructure provision is higher when the country trades with a less productive country or one bigger in size. The effects are more pronounced in the presence of producer lobbies, i.e., lobbying leads to greater infrastructure provision than under a social planner. These results suggest that the stock of infrastructure in a country may depend on its openness and the size and productivity of its trading partners. A simple cross-country regression provides support for our hypothesis that more openness leads to higher infrastructure provision. This connection between openness and infrastructure provision has largely been overlooked in the literature, but is important especially for developing countries, which have poor infrastructure but are in the beginning stages of trade and liberalization.
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