A Model of Market-Enhancing Infrastructure

33 Pages Posted: 20 Dec 2001

See all articles by Mark A. Schankerman

Mark A. Schankerman

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

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)

Date Written: May 2000

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.

Keywords: Infrastructure, heterogeneity, competition, market selection, restructuring, entry, cost-benefit analysis

JEL Classification: L13. O12. P20

Suggested Citation

Schankerman, Mark A. and Aghion, Philippe, A Model of Market-Enhancing Infrastructure (May 2000). CEPR Discussion Paper No. 2462. Available at SSRN: https://ssrn.com/abstract=229402

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

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

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