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Infrastructure Quality and the Subsidy Trap

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Listed author(s):
  • 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.

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File URL: http://www-siepr.stanford.edu/repec/sip/09-017.pdf
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Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 09-017.

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Date of creation: Nov 2009
Date of revision: Nov 2009
Handle: RePEc:sip:dpaper:09-017
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Keywords: developing countries infrastructure; infrastructure subsidies; subsidy trap;

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Find related papers by JEL classification:
  • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

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  1. 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.
  2. Leonardo Morales & Carlos Medina, 2007. "Stratification and Public Utility Services in Colombia: Subsidies to Households or Distortion of Housing Prices?," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Spring 20), pages 41-99, January.
  3. Kristin Komives & Vivien Foster & Jonathan Halpern & Quentin Wodon, 2005. "Water, Electricity, and the Poor : Who Benefits from Utility Subsidies?," World Bank Publications, The World Bank, number 6361.
  4. 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.
  5. repec:hoo:wpaper:e-90-11 is not listed on IDEAS
  6. 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.
  7. Carlos Medina & Leonardo Fabio Morales, 2007. "Demanda por Servicios Públicos Domiciliarios en Colombia y Subsidios: Implicaciones sobre el Bienestar," BORRADORES DE ECONOMIA 004293, BANCO DE LA REPÚBLICA.
  8. Marcela Meléndez Arjona & Camila Casas & Pablo Medina, 2004. "Subsidios al consumo de los servicios públicos en Colombia ¿hacia donde movernos?," INFORMES DE INVESTIGACIÓN 003529, FEDESARROLLO.
  9. 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.
  10. Munasinghe, Mohan, 1980. " Costs Incurred by Residential Electricity Consumers Due to Power Failures," Journal of Consumer Research, Oxford University Press, vol. 6(4), pages 361-369, March.
  11. 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.
  12. 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.
  13. 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.
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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, 2016, Boston, Massachusetts 235569, Agricultural and Applied Economics Association.
  3. Carranza,Eliana & Meeks,Robyn, 2016. "Shedding light : understanding energy efficiency and electricity reliability," Policy Research Working Paper Series 7891, The World Bank.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. Michael Greenstone & B. Kelsey Jack, 2013. "Envirodevonomics: A Research Agenda for a Young Field," NBER Working Papers 19426, National Bureau of Economic Research, Inc.
  9. 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.
  10. Nicholas Ryan, 2017. "The Competitive Effects of Transmission Infrastructure in the Indian Electricity Market," NBER Working Papers 23106, National Bureau of Economic Research, Inc.

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