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Infrastructure Quality and the Subsidy Trap

Author

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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.

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
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    References listed on IDEAS

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    1. Nesbakken, Runa, 2001. " Energy Consumption for Space Heating: A Discrete-Continuous Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(1), pages 165-184, March.
    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. Leonardo Morales & Carlos Medina, 2007. "Stratification and Public Utility Services in Colombia: Subsidies to Households or Distortion of Housing Prices?," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 41-99, January.
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    Citations

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    Cited by:

    1. Catherine Wolfram & Orie Shelef & Paul Gertler, 2012. "How Will Energy Demand Develop in the Developing World?," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 119-138, Winter.
    2. Zhang, Jun, 2016. "Carbon Tax Incidence and Household Energy Demand in the U.S," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235569, Agricultural and Applied Economics Association.
    3. repec:eee:ecmode:v:68:y:2018:i:c:p:217-228 is not listed on IDEAS
    4. Carranza,Eliana & Meeks,Robyn, 2016. "Shedding light : understanding energy efficiency and electricity reliability," Policy Research Working Paper Series 7891, The World Bank.
    5. repec:eee:enepol:v:108:y:2017:i:c:p:55-69 is not listed on IDEAS
    6. Raul Alberto Jimenez Mori, 2017. "Are Blackout Days Free of Charge?: Valuation of Individual Preferences for Improved Electricity Services," IDB Publications (Working Papers) 8424, Inter-American Development Bank.
    7. Antonio Estache, 2016. "Institutions for Infrastructure in Developing Countries: What We Know and the Lot We still Need to Know," Working Papers ECARES ECARES 2016-27, ULB -- Universite Libre de Bruxelles.
    8. Nicholas Ryan, 2017. "The Competitive Effects of Transmission Infrastructure in the Indian Electricity Market," NBER Working Papers 23106, National Bureau of Economic Research, Inc.
    9. repec:gam:jsusta:v:10:y:2018:i:5:p:1599-:d:146710 is not listed on IDEAS
    10. repec:eee:enepol:v:113:y:2018:i:c:p:466-477 is not listed on IDEAS
    11. Szabó, Andrea & Ujhelyi, Gergely, 2015. "Reducing nonpayment for public utilities: Experimental evidence from South Africa," Journal of Development Economics, Elsevier, vol. 117(C), pages 20-31.
    12. 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.
    13. repec:eee:wdevel:v:102:y:2018:i:c:p:345-357 is not listed on IDEAS
    14. Deng, Zhongqi & Song, Shunfeng & Chen, Yongjun, 2016. "Private participation in infrastructure project and its impact on the project cost," China Economic Review, Elsevier, vol. 39(C), pages 63-76.
    15. Michael Greenstone & B. Kelsey Jack, 2013. "Envirodevonomics: A Research Agenda for a Young Field," NBER Working Papers 19426, National Bureau of Economic Research, Inc.
    16. Andrea Szabo & Gergely Ujhelyi, 2014. "Can Information Reduce Nonpayment for Public Utilities? Experimental Evidence from South Africa," Working Papers 2014-114-31, Department of Economics, University of Houston.

    More about this item

    Keywords

    developing countries infrastructure; infrastructure subsidies; subsidy trap;

    JEL classification:

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

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