Investment in trade facilitating infrastructure: A political-economy analysis |
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Institution: | 1. Department of Humanities and Social Sciences, Indian Institute of Technology Dharwad, Karnataka, 580011, India;2. Department of Economic Sciences, Indian Institute of Technology Kanpur, Uttar Pradesh, 208016, India;1. Development Economics (DEC), The World Bank, 1818 H St. NW, Washington, DC, 20433, USA;2. Macroeconomics and Fiscal Management (MFM), The World Bank, 1818 H St. NW, Washington, DC, 20433, USA;1. Kellogg School of Management, Northwestern University, Evanston, IL, 60208, USA;2. Department of Economics and Business Administration, Ariel University, Ariel, 40700, Israel |
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Abstract: | This paper analyzes public investment in infrastructure that facilitates international trade. It considers a world consisting of small open economies that face transport costs for exporting or importing a particular good. Transport costs can be lowered by an improvement in transport infrastructure. National governments non-cooperatively decide about their respective country's investment level. Governments' preferences are assumed to be biased in favor of producers' interests with consequences for equilibrium investments: Exporting countries, whose producers benefit from a transport cost reduction, spend more for infrastructure than importing countries, whose producers are protected by transport costs from foreign competition. This outcome is inefficient, and governments have an incentive to cooperate internationally. The paper also incorporates bilateral trade with two goods that benefit from infrastructure improvements as well as trade that results from offshoring. |
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Keywords: | Infrastructure Transport costs Political bias |
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