Modes of infrastructure financing and the ‘Big Push’ in development economics

In an economy where different agents undertake simultaneous and interdependent investments, this paper models the possibility that the outcome where some players invest and others do not invest is sustained in Nash equilibrium. It is well known that in models where all goods are financed through prices charged by the suppliers (“tolls” in the case of transport infrastructures), there are only two coordination equilibria: the “Big push” equilibrium, where every agent involved invests; and the “Poverty trap”, whenever none invests. We consider a two person simultaneous game, where the Government decides whether to build a highway and a firm producing a composite good decides whether to use it. Instead of resorting to tolls, the infrastructure is funded through an income tax that falls on wages. Having the Government supplying the highway and the firm not using it is a Nash equilibrium if the employment generated by the construction of the highway is intermediate and the rate of the wage income tax is high. The proliferation of unused transport infrastructures in Southern Europe seems to be related with low effects of public works upon the demand for labor and with demanddepressing “austerity” macroeconomic policies.