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The welfare effects of infrastructure investment in a heterogeneous agents economy

  • John Gibson EMAIL logo and Felix Rioja
Published/Copyright: June 17, 2019
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 20 Issue 1

Abstract

Public infrastructure is one of the foundations for the economic growth of a country. While there is a strong consensus regarding infrastructure’s effect on growth, less is known about the effect of infrastructure on welfare and the distribution of wealth. In this paper, we examine the quantitative effect of infrastructure investment on welfare and the degree of inequality present within a developing country. In so doing, we characterize the effects resulting from increased infrastructure investment by tracing out the entire transition path between steady states. Three results standout: (i) both average and individual welfare effects are sizable, regardless of how the additional investment is financed, (ii) when distortionary taxes are adjusted to finance additional investment, poorer agents benefit more when the interest income tax is used, while richer agents benefit more when either the consumption or labor income taxes are used, (iii) inequality, as measured by the wealth Gini, rises in the short-run, but the long-run effect depends on which financing method is chosen.

Keywords: incomplete markets; individual welfare; inequality; infrastructure; transitional dynamics

Acknowledgement

We thank Manoj Atolia, Santanu Chatterjee, Edward Prescott, Vincenzo Quadrini, Richard Rogerson, Steve Turnovsky, and Gustavo Ventura for helpful discussions on an earlier draft of the paper. We also thank participants at the following seminars and conferences: Arizona State University; Bolivian Conference on Development Economics; Latin American Meetings of the Econometric Society; Latin American and Caribbean Economic Association; Midwest Macroeconomic Meetings; Southern Economic Association Meetings; St. Lawrence University; University of Maryland Baltimore County; University of Massachusetts Lowell; University of Mississippi; and University of Texas El Paso.

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Supplementary Material

The online version of this article offers supplementary material (DOI: https://doi.org/10.1515/bejm-2019-0095).

Published Online: 2019-06-17

©2020 Walter de Gruyter GmbH, Berlin/Boston

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https://doi.org/10.1515/bejm-2019-0095
Keywords for this article
incomplete markets; individual welfare; inequality; infrastructure; transitional dynamics

Articles in the same Issue

  1. Contributions
  2. An empirical study on the New Keynesian wage Phillips curve: Japan and the US
  3. Risk averse banks and excess reserve fluctuations
  4. Advances
  5. Signaling in monetary policy near the zero lower bound
  6. Contributions
  7. Robust learning in the foreign exchange market
  8. Foreign official holdings of US treasuries, stock effect and the economy: a DSGE approach
  9. Discretion rather than rules? Outdated optimal commitment plans versus discretionary policymaking
  10. Agency costs and the monetary transmission mechanism
  11. Advances
  12. Optimal monetary policy in a model of vertical production and trade with reference currency
  13. The financial accelerator and marketable debt: the prolongation channel
  14. The welfare cost of inflation with banking time
  15. Prospect Theory and sentiment-driven fluctuations
  16. Contributions
  17. Household borrowing constraints and monetary policy in emerging economies
  18. The macroeconomic impact of shocks to bank capital buffers in the Euro Area
  19. The effects of monetary policy on input inventories
  20. The welfare effects of infrastructure investment in a heterogeneous agents economy
  21. Advances
  22. Collateral and development
  23. Contributions
  24. Financial deepening in a two-sector endogenous growth model with productivity heterogeneity
  25. Is unemployment on steroids in advanced economies?
  26. Monitoring and coordination for essentiality of money
  27. Dynamics of female labor force participation and welfare with multiple social reference groups
  28. Advances
  29. Technology and the two margins of labor adjustment: a New Keynesian perspective
  30. Contributions
  31. Changing demand for general skills, technological uncertainty, and economic growth
  32. Job competition, human capital, and the lock-in effect: can unemployment insurance efficiently allocate human capital
  33. Fiscal policy and the output costs of sovereign default
  34. Animal spirits in an open economy: an interaction-based approach to the business cycle
  35. Ramsey income taxation in a small open economy with trade in capital goods
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