Working Paper: CEPR ID: DP2052
Authors: Philippe Aghion; Mark Schankerman
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.
Keywords: infrastructure; competition; entry; transition
JEL Codes: L1; O1; P2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| infrastructure investment (H54) | reduces transaction costs (D23) |
| reduces transaction costs (D23) | intensifies competition among firms (L11) |
| infrastructure investment (H54) | intensifies competition among firms (L11) |
| infrastructure investment (H54) | encourages exit of inefficient firms (L19) |
| infrastructure investment (H54) | promotes entry of low-cost competitors (L13) |
| reduces transaction costs (D23) | improves overall efficiency (D61) |
| infrastructure investment (H54) | enhances incentives for low-cost firms to restructure (L11) |