IDEAS home Printed from https://ideas.repec.org/p/sip/dpaper/09-017.html
   My bibliography  Save this paper

Infrastructure Quality and the Subsidy Trap

Author

Listed:
  • 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.

Suggested Citation

  • Shaun McRae, 2009. "Infrastructure Quality and the Subsidy Trap," Discussion Papers 09-017, Stanford Institute for Economic Policy Research, revised Nov 2009.
    • Handle: RePEc:sip:dpaper:09-017
    as

    Download full text from publisher

    File URL: http://www-siepr.stanford.edu/repec/sip/09-017.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. repec:bla:scandj:v:103:y:2001:i:1:p:165-84 is not listed on IDEAS
    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. Michael Parti & Cynthia Parti, 1980. "The Total and Appliance-Specific Conditional Demand for Electricity in the Household Sector," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 309-321, Spring.
    4. Leonardo Morales & Carlos Medina, 2007. "Stratification and Public Utility Services in Colombia: Subsidies to Households or Distortion of Housing Prices?," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 41-99, January.
    5. 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.
    6. Carlos Medina & Leonardo Fabio Morales, 2007. "Demanda por Servicios Públicos Domiciliarios en Colombia y Subsidios: Implicaciones sobre el Bienestar," Borradores de Economia 4293, Banco de la Republica.
    7. 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.
    8. Olmstead, Sheila M. & Michael Hanemann, W. & Stavins, Robert N., 2007. "Water demand under alternative price structures," Journal of Environmental Economics and Management, Elsevier, vol. 54(2), pages 181-198, September.
    9. 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.
    10. Maddock, Rodney & Castano, Elkin & Vella, Frank, 1992. "Estimating Electricity Demand: The Cost of Linearising the Budget Constraint," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 350-354, May.
    11. Kristin Komives & Vivien Foster & Jonathan Halpern & Quentin Wodon, 2005. "Water, Electricity, and the Poor : Who Benefits from Utility Subsidies?," World Bank Publications - Books, The World Bank Group, number 6361, April.
    12. repec:fth:stanho:e-90-11 is not listed on IDEAS
    13. Moffitt, Robert, 1986. "The Econometrics of Piecewise-Linear Budget Constraints: A Survey and Exposition of the Maximum Likelihood Method," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(3), pages 317-328, July.
    14. Marcela Meléndez Arjona & Camila Casas & Pablo Medina, 2004. "Subsidios al consumo de los servicios públicos en Colombia ¿hacia donde movernos?," Informes de Investigación 3529, Fedesarrollo.
    15. Munasinghe, Mohan, 1980. "Costs Incurred by Residential Electricity Consumers Due to Power Failures," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 6(4), pages 361-369, March.
    16. repec:hoo:wpaper:e-90-11 is not listed on IDEAS
    17. Jerry A. Hausman, 1979. "Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 33-54, Spring.
    18. 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.
    19. Peter C. Reiss & Matthew W. White, 2005. "Household Electricity Demand, Revisited," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 853-883.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Darío F. Jiménez & Sergio A. Orrego & Felipe A. Vásquez & Roberto D. Ponce, 2017. "Estimating water demand for urban residential use using a discrete-continuous model and disaggregated data at the household level: the case of the city of Manizales, Colombia," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 86, pages 153-178, Enero - J.
    2. Jiménez, Darío F. & Orrego, Sergio A. & Vásquez, Felipe A. & Ponce, Roberto D., 2016. "Estimación de la demanda de agua para uso residencial urbano usando un modelo discreto-continuo y datos desagregados a nivel de hogar: el caso de la ciudad de Manizales, Colombia," Revista Lecturas de Economía, Universidad de Antioquia, CIE, issue 86, pages 153-178, December.
    3. Zhang, Zibin & Cai, Wenxin & Feng, Xiangzhao, 2017. "How do urban households in China respond to increasing block pricing in electricity? Evidence from a fuzzy regression discontinuity approach," Energy Policy, Elsevier, vol. 105(C), pages 161-172.
    4. Baerenklau, Kenneth A., 2015. "Theoretically consistent welfare estimation under block pricing: the case of water demand," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205723, Agricultural and Applied Economics Association.
    5. Aaron Strong & V. Kerry Smith, 2010. "Reconsidering the Economics of Demand Analysis with Kinked Budget Constraints," Land Economics, University of Wisconsin Press, vol. 86(1), pages 173-190.
    6. Reiss, Peter C. & White, Matthew W., 2002. "Household Electricity Demand, Revisited," Research Papers 1830, Stanford University, Graduate School of Business.
    7. Mansur, Erin T. & Olmstead, Sheila M., 2012. "The value of scarce water: Measuring the inefficiency of municipal regulations," Journal of Urban Economics, Elsevier, vol. 71(3), pages 332-346.
    8. Cristina Lopez-Mayan, 2014. "Microeconometric Analysis of Residential Water Demand," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 59(1), pages 137-166, September.
    9. Kenneth A. Baerenklau & María Pérez-Urdiales, 2019. "Can Allocation-Based Water Rates Promote Conservation and Increase Welfare? A California Case Study," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-26, April.
    10. Wang, Xiangrui & Lee, Jukwan & Yan, Jia & Thompson, Gary D., 2017. "Modeling Rational But Inattentive Consumer’s Residential Water Demand," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258555, Agricultural and Applied Economics Association.
    11. Olmstead, Sheila M. & Michael Hanemann, W. & Stavins, Robert N., 2007. "Water demand under alternative price structures," Journal of Environmental Economics and Management, Elsevier, vol. 54(2), pages 181-198, September.
    12. Lin, Boqiang & Chen, Xing, 2018. "Is the implementation of the Increasing Block Electricity Prices policy really effective?--- Evidence based on the analysis of synthetic control method," Energy, Elsevier, vol. 163(C), pages 734-750.
    13. Henrique Monteiro, 2010. "Residential Water Demand in Portugal: checking for efficiency-based justifications for increasing block tariffs," Working Papers Series 1 ercwp0110, ISCTE-IUL, Business Research Unit (BRU-IUL).
    14. Koji Miyawaki & Yasuhiro Omori & Akira Hibiki, 2006. "Bayesian Estimation of Demand Functions under Block Rate Pricing," CIRJE F-Series CIRJE-F-424, CIRJE, Faculty of Economics, University of Tokyo.
    15. Kenneth A. Baerenklau & Kurt A. Schwabe & Ariel Dinar, 2014. "The Residential Water Demand Effect of Increasing Block Rate Water Budgets," Land Economics, University of Wisconsin Press, vol. 90(4), pages 683-699.
    16. Klaiber, H. Allen & Smith, V. Kerry & Kaminsky, Michael & Strong, Aaron, 2010. "Estimating the Price Elasticity of Demand for Water with Quasi Experimental Methods," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61039, Agricultural and Applied Economics Association.
    17. Koji Miyawaki & Yasuhiro Omori & Akira Hibiki, 2011. "Panel Data Analysis Of Japanese Residential Water Demand Using A Discrete/Continuous Choice Approach," The Japanese Economic Review, Japanese Economic Association, vol. 62(3), pages 365-386, September.
    18. Hancevic, Pedro Ignacio & Lopez-Aguilar, Javier Alejandro, 2019. "Energy efficiency programs in the context of increasing block tariffs: The case of residential electricity in Mexico," Energy Policy, Elsevier, vol. 131(C), pages 320-331.
    19. Koji Miyawaki & Yasuhiro Omori, 2007. "Duality-Based Analysis of Residential Gas Demand under Decreasing Block Rate Pricing," CIRJE F-Series CIRJE-F-506, CIRJE, Faculty of Economics, University of Tokyo.
    20. Christopher Boyer & Damian Adams & Tatiana Borisova & Christopher Clark, 2012. "Factors Driving Water Utility Rate Structure Choice: Evidence from Four Southern U.S. States," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 26(10), pages 2747-2760, August.

    More about this item

    Keywords

    developing countries infrastructure; infrastructure subsidies; subsidy trap;
    All these keywords.

    JEL classification:

    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sip:dpaper:09-017. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anne Shor The email address of this maintainer does not seem to be valid anymore. Please ask Anne Shor to update the entry or send us the correct address (email available below). General contact details of provider: https://edirc.repec.org/data/cestaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.