Productiveness and welfare implications of public infrastructure: a dynamic two-sector general equilibrium analysis

This paper develops a dynamic general equilibrium model that provides an internally consistent micro-foundations framework where various effects of infrastructure policy changes can be studied. Devoting additional resources to infrastructure investment can payoff in terms of sizable increases in GDP and private investment. In addition to this, the model also makes predictions concerning changes in the welfare of agents resulting from additional infrastructure investment. Specific policy recommendations that attain highest welfare gains are computed. The recommendation is that on average an additional 4% of GDP per year should be devoted to public investment in the Latin American countries in the sample. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: E62; O4; C61; C68.