Competition, Entry, and the Social Returns to Infrastructure in Transition Economies

Posted: 27 Mar 1999

See all articles by Philippe Aghion

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Mark A. Schankerman

London School of Economics and Political Science; Centre for Economic Policy Research (CEPR)

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Abstract

This paper presents a simple model for analysing the contribution of investments in physical and institutional infrastructure to the transition process. In addition to the direct cost savings, infrastructure investment generates important indirect effects, or transition impacts. The model shows that, by reducing transaction costs, infrastructure intensifies product market competition. This leads to more effective weeding out of the existing high-cost firms in the market. In this model, infrastructure also increases the incentives for low-cost firms to restructure which generates additional efficiency gains, but exacerbates the existing cost asymmetry in the economy. Finally, infrastructure investment enhances the incentives for relatively low-cost firms to enter the market, and thus improves the efficiency of the entry process. The importance of these transition impacts of infrastructure depends on features of the economy, such as the degree of cost asymmetry among firms, the proportion of high-cost firms, the cost of restructuring, and entry costs for new firms.

JEL Classification: L1, O1, P2

Suggested Citation

Aghion, Philippe and Schankerman, Mark A., Competition, Entry, and the Social Returns to Infrastructure in Transition Economies. The Economics of Transition, Vol. 7, No. 1, 1999. Available at SSRN: https://ssrn.com/abstract=157832

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow ( email )

London
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mark A. Schankerman (Contact Author)

London School of Economics and Political Science ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7518 (Phone)
+44 20 7831 1840 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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