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A model of market-enhancing infrastructure

Aghion, Philippe and Schankerman, Mark (2000) A model of market-enhancing infrastructure. 2462. Centre for Economic Policy Research, London, UK.

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Abstract

This paper develops a framework for evaluating the social returns to infrastructure investments that intensify product market competition. We use a circular model with asymmetric production costs both for incumbent firms and potential entrants, where unit transport cost measures the intensity of competition (quality of infrastructure). The static and dynamic welfare effects of infrastructure investment that lowers unit transport cost are analysed, focusing on market selection among asymmetric firms, restructuring, and entry. We show how these welfare effects depend on the initial level of market development, as measured by the distribution of costs in the economy, the number of incumbent firms, the degree of market competition, and restructuring and entry costs. The model generates an endogenous demand for infrastructure investment, and the possibility of a low infrastructure trap that arises from cost heterogeneity rather than from any kind of non-convexities. We simulate the relative welfare effects of reducing transport, restructuring and entry costs, and we evaluate in each case the fraction of social returns which traditional cost-benefit analysis would fail to capture.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.cepr.org
Additional Information: © 2000 Philippe Aghion and Mark Schankerman
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
Journal of Economic Literature Classification System: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets
O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development
P - Economic Systems > P2 - Socialist Systems and Transitional Economies > P20 - General
Sets: Collections > Economists Online
Departments > Economics
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 2462
Date Deposited: 27 May 2008 13:47
URL: http://eprints.lse.ac.uk/5085/

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